When a business is a partnership, its partners are each taxed on their share of the profit. Here's how to deal with this in FreeAgent if the partners' shares are unequal.
When a business is a partnership or LLP, its partners are each taxed on their share of the profit.
By default FreeAgent gives an equal share of the profit to each partner.
But what happens if the partners don't split the profit equally between themselves?
An example would be a 2-partner partnership where one partner pays tax on 75% of the profit, and the other on 25%.
Or a 3-partner partnership where one partner is taxed on 50% of the profits and the other two on 25% each.
Why would this happen?
It's often for tax planning, for example a husband and wife partnership where the wife also has her own self-employed business. To make sure neither of them goes into higher-rate tax, their accountant might advise them to split the partnership profit at 75% to the husband and 25% to the wife.
OK, now tell me how to set that up in FreeAgent.
Navigate to the 'Taxes' tab at the top of the screen and select 'Self Assessment' from the drop-down menu.
Let's say that of these two partners, from the tax year 2021/22 Emily will be taxed on 25% and Nathan on 75%.
Go to the first partner for the relevant tax year, and select either of the 'Edit' buttons.
You need to set the partnership profit share here.
Do a bit of jiggery pokery with percentages and fractions with the lowest common denominator, to work out what each partner's share should be.
In this case, Emily's share is 25%. That's 1/4 so her share is 1, like this.
Nathan's share is 75%, which is 3/4, so his share is 3, like this.
For a 20:80 profit share between two partners, the shares would be 1 and 4 (1/5 and 4/5).
For a 50:25:25 share between three partners, the shares would be 2, 1 and 1 (2/4, 1/4 and 1/4).