As a partner in an LLP, you’re not operating in fixed-salary territory anymore. Instead, you are likely to have a profit-share allocation where your earnings for tax purposes are the amount of the profits during the tax year that have been allocated to you. If that amount, in a simplified example, is £300,000, then you pay tax on partnership profits of £300,000 in your self-assessment tax return.

This is unlikely to be the amount that you have been paid in cash.

You will pay tax on more than you receive

Any amounts that you receive as cash payments during the year and any non-cash benefits will be treated as “drawings on account of future profits.” These drawings may be lower than the profit allocation, depending on the cash flow of the firm.

In fact, it’s fair to say that drawings almost always are lower than profit allocations, although there may be periodic cash distributions to catch up. This means you will be paying tax on amounts more than those you have actually received. To continue the previous example, if your drawings come in at £275,000, you would be liable to pay tax on the profit allocation of £300,000.

All of these allocations and drawings take place in your current account. The current account can be an asset where you are owed money, or liability where you owe money to the LLP. Thus, it is much more liquid than your capital account.

Whether it can be overdrawn from time to time depends on the terms of the LLP deed.

What are your earnings, anyway?

To further confuse matters, many firms seek to structure their remuneration so it resembles what you would receive if you were an employee and shareholder: Salary + Bonus + Dividend.

Invariably, each component is paid at different times and in different tranches:

• Salary: you may receive a basic allocation roughly equivalent to the appropriate level of salary and often paid monthly.
• Bonus: You may also receive a rachet or uptick percentage on the salary amount that is the equivalent of a bonus. This could be based on your own performance or that of your team or department, and paid quarterly, half yearly or annually.
• Dividend: Finally, you might receive a share of the residual profits after all of these priority allocations have been made across the membership of the firm

Before you can plan anything, you need to get clear on what you are earning gross of tax, when that is going to be paid, and what deductions the firm will make from the payment before distributing it to you. It’s only with a clear view of income that you can stabilise your tax affairs and have more predictable cash flows to plan for.

Adrian Johnson