Partnership profit share

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.

Unequal shares

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 their 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.

Enter the relevant 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 their share is 1, like this.

Nathan's share is 75%, which is 3/4, so their 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).

Please keep in mind that the value entered in the ‘Profit Share’ field needs to be a round number. If you were to enter a number with decimals, FreeAgent will round it down when you select ‘Save Changes’. For example, if you enter 3.75, FreeAgent will save a profit share of 3.