Taxation (UK) · Income from self-employment

Partnership Taxation and Profit Sharing in TX-UK

Updated 11 October 2026 · Fact-checked

A partnership computes its tax-adjusted trading profit as one unit. You then split that profit between partners using the profit sharing arrangement for each period: salaries, then interest on capital, then the balance in the profit sharing ratio. Each partner is taxed on their share as if it were a sole trader's profit.

Understand Partnerships and Profit Sharing

A UK partnership is not taxed as a separate person for income tax. The partnership only works out one number: the adjusted trading profit for its accounting period. This uses the same adjustment of profits and capital allowances rules as for a sole trader.

The partners then share that profit. The split follows the partnership agreement. Salaries, interest on capital and profit sharing ratios (PSR) are only ways of dividing profit. They are not business expenses, so you never deduct them when adjusting profits.

Once each partner's share is found, it is treated as that partner's own trading profit. You then apply the sole trader rules to each partner separately: basis of assessment, opening and closing year rules, loss relief and Class 4 National Insurance. Each partner also has their own other income and personal allowance.

When something changes during the period, such as a new partner joining, a partner leaving or a change in the PSR, you split the profit into time periods. You time-apportion the profit (usually assuming it accrues evenly) and apply the arrangement that applied in each time period. A new partner starts a trade for tax purposes, so opening year rules apply to them. A leaving partner has cessation rules applied to them. The continuing partners carry on without a change of basis.

Losses are allocated in exactly the same way. A partner's share of a loss is treated as that partner's own trading loss and can be relieved under the sole trader loss rules.

Key rules to remember

Order of profit allocation: Adjusted profit − salaries − interest on capital = residual profit, shared in the PSR; Salaries and interest are allocated first, even if the residual is nil or negative. A negative residual is shared in the PSR.
Partner's total share: Salary + interest on capital + share of residual; The total shares of all partners must add back to the adjusted profit (or loss) for the period.
Interest on capital: Capital × agreed rate × time fraction; Use the rate in the question and the capital each partner holds. Adjust if the period is part of a year.
Change during the period: Profit for time period = Adjusted profit × months in period ÷ months in accounting period; Use this when the PSR, salaries or partners change. Assume profit accrues evenly unless told otherwise.
Partner's tax treatment: Share of profit = partner's own trading profit; Apply the sole trader rules to each partner individually, including loss relief and Class 4 National Insurance.

How to solve Partnerships and Profit Sharing questions

Use this method for any partnership allocation question. Do it for each period in which the arrangement is different.

1Start with the tax-adjusted trading profit of the partnership, after capital allowances. Salaries and interest on capital are not deductible, so add back any that were charged in the accounts.
2Split the accounting period into time periods wherever the partners, salaries, interest or PSR change. Time-apportion the profit over the months in each period.
3For each time period, allocate the salaries first, then the interest on capital, each in proportion to the period if it is not a full year.
4Deduct these from the period's profit to find the residual. Share it in the PSR for that period. A residual loss is shared in the same way.
5Add up each partner's amounts across all time periods. Check that the totals equal the partnership's adjusted profit.
6For each partner, treat the total as their trading profit. Apply basis of assessment: opening year rules for a new partner, cessation rules for a leaving partner, and the normal rules for continuing partners.
7If there is a loss, treat each partner's share as their own loss and choose the relief that suits them. Remember the cap on income tax reliefs.

Quickest way: Three-line allocation grid

When to use it: Use this in Section C when the question gives salaries, interest and a PSR and you need the profit shares fast.

Draw columns for total, and one column for each partner. Add a row for each time period if anything changes.
Fill in the rows in order: profit, salaries, interest on capital, balance in the PSR. Write the totals so that the columns across add up to the profit.
Check that the partners' totals add up to the adjusted profit. If they do not, the error is almost always in the residual or the time apportionment.
Only then move on to the tax computation for the partner the question asks about.

Common mistakes in Partnerships and Profit Sharing

Deducting partners' salaries or interest on capital when adjusting profit.
They look like employee salary or loan interest in the accounts.
Fix: Remember they are appropriations of profit. Add them back if charged, then allocate them to the partners.
Sharing the whole profit in the PSR and ignoring salaries and interest.
Students rush to the ratio because it is the simplest step.
Fix: Always take salaries and interest first. Only the residual is shared in the PSR.
Stopping the allocation when the residual is negative.
A negative balance looks like a mistake.
Fix: Allocate salaries and interest anyway. Share the negative residual in the PSR. A partner can end up with a small share even though the total is a profit.
Applying the new PSR to the whole period when a partner joins or the ratio changes part-way.
Students forget the profit must be time-apportioned.
Fix: Split into time periods, apply the arrangement for each period, then add up each partner.
Applying opening year rules to the existing partners when a new partner joins.
Students think the whole business has started again.
Fix: Opening year rules apply only to the new partner. Continuing partners stay on their normal basis of assessment.
Using the partnership's profit instead of the partner's share in the tax computation.
Students forget each partner is taxed individually.
Fix: Use the partner's allocated share as their trading profit, then add their own other income and allowances.

Worked examples

Example 1

Ann and Ben are in partnership. The tax-adjusted trading profit for the year ended 31 March is £120,000. Ann is entitled to a salary of £20,000. Interest on capital is paid at 5% a year: Ann's capital is £100,000 and Ben's is £60,000. The balance is shared Ann 3 : Ben 2. Calculate each partner's share of profit.

Show the solution

Salary: Ann £20,000, Ben nil.
Interest on capital: Ann £100,000 × 5% = £5,000. Ben £60,000 × 5% = £3,000.
Residual: £120,000 − £20,000 − £5,000 − £3,000 = £92,000.
Share the residual 3 : 2. Ann: £92,000 × 3/5 = £55,200. Ben: £92,000 × 2/5 = £36,800.
Total for Ann: £20,000 + £5,000 + £55,200 = £80,200. Total for Ben: £3,000 + £36,800 = £39,800.
Check: £80,200 + £39,800 = £120,000.

Answer: Ann: £80,200. Ben: £39,800. Each is taxed on their share as their own trading profit.

Example 2

Dan and Eve share profits equally. On 1 July, Fay joins and from then on profits are shared Dan 2 : Eve 2 : Fay 1, with no salaries or interest. The tax-adjusted trading profit for the year ended 31 December is £240,000, assumed to accrue evenly. Calculate each partner's share and state how Fay's share is taxed.

Show the solution

Split the year. 1 January to 30 June is 6 months. 1 July to 31 December is 6 months.
Profit for each period: £240,000 × 6/12 = £120,000.
First period, shared equally: Dan £60,000, Eve £60,000.
Second period, shared 2 : 2 : 1. Dan: £120,000 × 2/5 = £48,000. Eve: £48,000. Fay: £120,000 × 1/5 = £24,000.
Totals: Dan £60,000 + £48,000 = £108,000. Eve £60,000 + £48,000 = £108,000. Fay £24,000.
Check: £108,000 + £108,000 + £24,000 = £240,000.
Fay starts a trade as a partner on 1 July, so opening year rules apply to her share. Dan and Eve continue on their normal basis of assessment.

Answer: Dan £108,000, Eve £108,000, Fay £24,000. Fay's profits are taxed under the opening year rules, as for a new sole trader.

Exam tips

Show the allocation grid even if you make an arithmetic slip. Marks are given for the order: salaries, interest, then the residual in the PSR.
Read the question for the date of any change. Months of each arrangement decide the time apportionment.
Always add up each partner's total and check it to the partnership profit before moving on.
State clearly which partner you are taxing. Use the opening year rules for a new partner and the cessation rules for a partner who leaves.
In objective test questions, watch for a trap: salaries and interest on capital are not deductible expenses in the adjustment of profits.

Practice questions from Income from self-employment

Partnerships and Profit Sharing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalPartnerships and Limited Liability Partnerships

Partnerships and Profit Sharing: frequently asked questions

Are partners' salaries deductible when computing partnership profit?

No. A partner's salary is a way of sharing profit, not an expense. Add it back if it was charged in the accounts, then allocate it to the partner.

How are profits allocated when a new partner joins?

Split the accounting period at the date the partner joins. Time-apportion the profit, then apply the sharing arrangement that applied in each part. The new partner is taxed under opening year rules.

How are partnership losses treated for tax?

Losses are allocated using the same salaries, interest and PSR rules. Each partner's share is treated as their own trading loss. They can then use the sole trader loss reliefs, subject to the cap on income tax reliefs, which is the higher of £50,000 or 25% of income unless otherwise restricted.

Is a partnership taxed as one entity for income tax?

Only the profit is computed once. Each partner is then taxed individually on their share, with their own other income, allowances and tax rates.