Trading profits of a partnership

Produced by Tolley

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Trading profits of a partnership
  • Introduction
  • Basic computational principles
  • Rent paid to a partner
  • Interest paid on partnership capital
  • Other payments to partners to reimburse them for other costs
  • Capital allowances
  • Payments of ‘salary’ made to partners

Trading profits of a partnership


This note explains the general rules for the calculation of partnership profits before allocation to the partners. Once the partnership profits are calculated, partners are free to agree amongst themselves how the profits of the partnership are to be allocated between them. There is no requirement that the profit share reflects the contribution made by the partners. This may allow for planning opportunities. See Allocation of partnership income ― Planning opportunities.

The profit-sharing ratio should be set out in the partnership agreement or other documentation, such as minutes of partnership meetings.

For a discussion of how trading profits, untaxed income, taxed income and capital gains are assessed on partners, see the Taxation of partnership trading profits, Taxation of untaxed income of a partnership, Taxation of taxed income of a partnership and Basic rules for partnership gains guidance notes.

For details of the tax treatment of coronavirus support payments, see the Taxation of coronavirus (COVID-19) support payments guidance note.

Basic computational principles

The calculation of partnership profits rests on four rules. These apply to all partnerships, irrespective of their type. Some may appear strange, even contradictory:

  1. under UK tax law, all partnerships are transparent for tax purposes. This is the case even for limited liability partnerships (LLPs) or Scottish partnerships where the partnership itself is a legal person (see the Partnerships ― overview guidance note)

  2. even though all partnerships are transparent for tax purposes, the first step when calculating the taxable profits of each partner is to assume that the partnership is a single UK resident individual or company, using the normal rules (depending upon whether the relevant partner is an individual or company)

  3. having calculated the profits of the partnership, the profits are allocated to the partners according to their agreed profit-sharing ratio. There is no need for this allocation to reflect the contribution made by the partners, whether in effort, capital or ideas

  4. the profit so allocated is then treated as arising on

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