Advanced Taxation (UK) · Income tax: income from self-employment

Partnerships and Limited Liability Partnerships: Profit Allocation and Loss Relief

Updated 11 October 2026 · Fact-checked

A partnership is not taxed itself. You compute its adjusted trading profit as if it were one trader, then split it between partners using the profit-sharing rules in force during each period of account (salaries, interest, then the ratio). Each partner is taxed on their share as self-employed income. Loss relief follows sole trader rules, with extra limits for limited partners and LLP members.

Understand Partnerships and Limited Liability Partnerships

A partnership is a group of people carrying on a business together. For income tax, the partnership is a reporting unit only. Each partner is taxed on their own share of the profit as trading income, and each partner has their own tax return and their own Class 4 NIC position.

You work in two stages. First, compute the adjusted trading profit of the whole firm for the period of account, after capital allowances, exactly as for a sole trader. Second, allocate that profit between the partners. Allocation uses the profit-sharing arrangements that applied during the period of account, not the tax year. Fixed amounts come first: partners' salaries and interest on capital. The balance is then shared in the profit-sharing ratio. Salaries and interest are only a way of sharing profit. They are not business expenses.

When a partner joins or leaves, the sharing arrangements change part-way through a period of account. You split the period at the date of change, time-apportion the profit to the nearest month, and apply each set of rules to its own part. Salaries stated per year must also be time-apportioned. A new partner is taxed like a new trader from the date of joining. A leaving partner is taxed like a trader who ceases. Continuing partners carry on as before.

Losses are allocated in the same way as profits. Each partner then claims relief as if the loss were their own trading loss: against general income of the year or the prior year, against gains, carried forward, early years relief, or terminal loss relief. Anti-avoidance limits restrict sideways relief for limited partners, LLP members and non-active partners. The cap on income tax reliefs may restrict it further.

A limited liability partnership (LLP) is taxed like an ordinary partnership for income tax if it carries on a business with a view to profit. Members are self-employed. The exception is a salaried member, who is treated as an employee. Learn the three conditions for that status.

Key rules to remember

Allocation order: Profit = salaries + interest on capital + balance shared in the profit-sharing ratio; Do this for each period in which the sharing arrangements are different. Salaries and interest are time-apportioned if stated per annum.
Time apportionment: Profit for a part-period = period profit × months in part ÷ months in period; The exam instructions say to apportion to the nearest month. Do not apportion by days.
Partner's taxable profit for a tax year: Sum of the partner's allocated shares for the part-periods that fall in the tax year; On the tax year basis, the profits of a tax year are those arising in it. Apportion each period of account to the tax year.
Opening and closing years: New partner: taxed from the date of joining. Leaving partner: taxed to the date of leaving; Treat each as starting or ceasing a trade. Continuing partners are not treated as ceasing.
Sideways loss relief limit: LLP members and limited partners: Relief against general income and gains is capped at the capital contributed; Unrelieved losses are carried forward against future profits from the same trade. They can be used sideways later if the contribution increases.
Sideways loss relief limit: non-active partners: Capped at £25,000 per tax year for a non-active partner, meaning one who spends on average less than 10 hours a week personally engaged in the business; This limit covers sideways relief against income and against capital gains. The £25,000 figure is not given in the tax tables, so you must learn it. Where a partner is also restricted by a capital contribution limit, the lower limit applies.
Cap on income tax reliefs: Reliefs are capped at the higher of £50,000 or 25% of income; This applies unless the relief is otherwise restricted. Apply it after the specific loss restrictions.
Salaried member of an LLP: Treated as an employee if conditions A, B and C are all met; A: it is reasonable to expect that at least 80% of the total amount payable by the LLP for the individual's services is disguised salary, meaning it is fixed, or varies without reference to the firm's overall profits. B: no significant influence over the firm's affairs. C: capital contribution is less than 25% of the disguised salary.

How to solve Partnerships and Limited Liability Partnerships questions

Use this method for any partnership question, whether it asks for profit shares, a change in partners or loss relief.

1Read the facts and list the dates: period of account, dates partners joined or left, and any change in the sharing rules.
2Start from the adjusted trading profit after capital allowances. Check whether the question has already given it to you.
3Split the period of account at each change. Time-apportion the profit to the nearest month, and time-apportion any salaries or interest stated per year.
4For each part-period, allocate salaries and interest first, then share the balance in the ratio. If the fixed amounts exceed the profit, the balance is negative and is shared in the ratio.
5Total each partner's shares across the part-periods and check that the partner totals equal the firm's profit.
6Convert to tax years. Apply opening year rules for a joiner and closing year rules for a leaver. Continuing partners are taxed on their shares of the profits arising in each tax year.
7For a loss, allocate it the same way. Then choose the relief for each partner, apply the LLP, limited partner or non-active limits, and apply the cap on income tax reliefs.
8State the carry-forward amount and give a brief reason for each restriction. This earns professional skills marks.

Quickest way: Columns and a total check

When to use it: Use this when a Section A or B question gives you the profit, the dates and the sharing rules, and time is short.

Draw one column per partner and one row per part-period. Add a total column.
Write the apportioned profit for each part-period in the total column before you split it.
Fill salaries and interest rows first, then the balance row. Do not forget to apportion the salaries.
Add across and down. The grand total must equal the firm's profit. If not, find the slip before moving on.
For losses, write the three limits side by side: contribution, £25,000 if non-active, and the higher of £50,000 or 25% of income. Take the lowest that applies.

Common mistakes in Partnerships and Limited Liability Partnerships

Using the profit-sharing ratio of the tax year instead of that of the period of account.
Students think in tax years because the income tax computation is by tax year.
Fix: Allocate profit within each period of account first. Convert to tax years only afterwards.
Giving a partner a full year of salary when they joined or left part-way through.
The salary is stated per annum and the apportionment is forgotten.
Fix: Multiply any annual salary or interest by the months in the part-period ÷ 12.
Treating continuing partners as having ceased and recommenced when a partner joins.
The change in partners is confused with a change of business.
Fix: Only the new partner starts and only the leaver ceases. Continuing partners keep their normal basis.
Applying the £25,000 limit to every partner with a loss.
The limit is learned without its condition. It is also not in the tax tables, so it is easy to forget or misuse.
Fix: Learn it as the limit for non-active partners only, meaning those who spend on average less than 10 hours a week personally on the business. Check the hours in the question.
Ignoring the capital contribution for an LLP member or limited partner.
Students treat LLP members like general partners.
Fix: Cap sideways and gains relief at the capital contributed. Carry the excess forward against future profits from the same trade.
Forgetting the cap on income tax reliefs after the specific restriction.
The first limit found seems to be the final answer.
Fix: Always test the result against the higher of £50,000 or 25% of income, and use the lowest figure.

Worked examples

Example 1

Adams and Brown trade in partnership. The adjusted trading profit after capital allowances for the year ended 31 March 2026 is £180,000. Until 30 September 2025 they shared profits 60:40. Chaudhry joined on 1 October 2025. From that date: salaries are Adams £10,000 a year and Chaudhry £20,000 a year, and the balance is shared Adams 40%, Brown 40%, Chaudhry 20%. Compute each partner's trading income for 2025/26.

Show the solution

Split the year: 6 months to 30 September 2025 and 6 months from 1 October 2025. Profit is £180,000 × 6 ÷ 12 = £90,000 for each part.
First part, ratio 60:40: Adams £54,000 and Brown £36,000.
Second part, salaries for 6 months: Adams £10,000 × 6 ÷ 12 = £5,000 and Chaudhry £20,000 × 6 ÷ 12 = £10,000. Total salaries £15,000.
Balance: £90,000 − £15,000 = £75,000. Adams 40% = £30,000, Brown 40% = £30,000, Chaudhry 20% = £15,000.
Second part totals: Adams £5,000 + £30,000 = £35,000. Brown £30,000. Chaudhry £10,000 + £15,000 = £25,000.
Year totals: Adams £54,000 + £35,000 = £89,000. Brown £36,000 + £30,000 = £66,000. Chaudhry £25,000.
Check: £89,000 + £66,000 + £25,000 = £180,000.
The year ended 31 March 2026 falls wholly within 2025/26, so each partner is taxed on their share for the period. Chaudhry is taxed on £25,000 from 1 October 2025.

Answer: Trading income for 2025/26: Adams £89,000, Brown £66,000, Chaudhry £25,000 (his first year of trading in the partnership).

Example 2

Mehta is a member of Delta LLP and has contributed £40,000 of capital. Delta LLP makes a tax-adjusted loss of £120,000 for the year ended 31 March 2026, shared equally between two members. Mehta has other income of £70,000 in 2025/26. (a) Mehta works full time in the LLP. How much loss can he set against general income for 2025/26? (b) How does the answer change if Mehta spends on average 5 hours a week on the business?

Show the solution

Mehta's share of the loss is £120,000 × 50% = £60,000.
(a) The LLP restriction caps sideways relief at the capital contributed: £40,000.
Test the cap on income tax reliefs: the higher of £50,000 or 25% × £70,000 = £17,500 is £50,000. £40,000 is below this, so it does not restrict further.
Sideways relief is £40,000. The remaining £60,000 − £40,000 = £20,000 is carried forward against future profits from Delta LLP.
(b) He is non-active because he works fewer than 10 hours a week on average. The £25,000 non-active limit applies to sideways relief. This figure is not in the tax tables, so you must know it.
The limits are: contribution £40,000, non-active limit £25,000 and cap on reliefs £50,000. The lowest is £25,000.
Sideways relief is £25,000. The unrelieved loss is £60,000 − £25,000 = £35,000, carried forward against future profits from the LLP.

Answer: (a) £40,000 is set against general income and £20,000 is carried forward. (b) £25,000 is set against general income and £35,000 is carried forward.

Exam tips

Show the allocation as a clear working with columns for each partner. Marks go for the method even if the profit figure is wrong.
Quote the exam instruction: apportion to the nearest month. Do not use days.
Always do a total check. A mismatch signals a missed salary apportionment.
In loss questions, write all the possible limits and state which one applies. Mention hours worked and capital contributed explicitly, because the scenario usually plants them.
For professional skills marks, add a short comment on advice, such as the effect of the LLP restriction on the timing of relief or a suggestion to increase capital contributed before the year end, if appropriate.

Practice questions from Income tax: income from self-employment

Partnerships and Limited Liability Partnerships in other exams

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

Partnerships and Limited Liability Partnerships: frequently asked questions

How are partnership profits allocated for tax?

You compute the firm's adjusted trading profit first. Then you allocate it using the profit-sharing arrangements of the period of account: salaries and interest first, then the balance in the ratio. Each partner is taxed on their share as trading income.

What happens to the tax of the other partners when a new partner joins?

Continuing partners are not treated as ceasing. The period of account is split at the date of joining and each part uses its own sharing rules. The new partner is taxed as a new trader from the joining date.

Can an LLP member claim all of their share of a loss against other income?

No. Sideways relief against general income and gains is limited to the capital the member has contributed. The excess is carried forward against future profits from the same trade. The cap on income tax reliefs may also apply.

What is a non-active partner for loss relief?

A non-active partner spends on average less than 10 hours a week personally engaged in the business. Sideways relief for such a partner, against income and gains, is limited to £25,000 a year. This figure is not in the tax tables, so you must learn it.