Attention: You’re a Partner but What Are You Actually Earning?

If you’ve recently become a partner in an LLP, you might assume your earnings work like they did when you were a salaried employee. They don’t. You now operate under a profit allocation system, which comes with a unique set of challenges, especially when it comes to understanding how much money you actually earn and how much tax you owe. 

The key point: you will pay tax on more than you receive in cash. And unless you fully understand how drawings and profit allocations work, you could run into serious cash flow issues. 

Interest: Profit ≠ Paycheck

As a partner, your income for tax purposes is based on your profit-share allocation, not the amount you take home. That means: 

• If your profit allocation is £300,000, that is what you’ll be taxed on. 

• But if your drawings are only £275,000, you’re paying tax on £25,000 you haven’t received. 

This mismatch between taxable profit and drawings is a standard part of LLP partnership. The difference typically shows up in your current account, which reflects your running balance with the firm. This account can show you’re either owed money (asset) or owe money (liability), depending on your firm’s cash flow and the structure of your drawings. 

Engagement: Three-Tiered Income Can Be Confusing

To make things trickier, many firms now structure partner remuneration to resemble a hybrid between employee and shareholder income, often in three parts: 

1. Salary-equivalent: Paid monthly, mimicking the predictability of employment income.
2. Bonus-equivalent: Paid based on personal, team, or departmental performance, in intervals such as quarterly or annually. 
3. Profit distribution (“dividend-equivalent”): A share in the firm’s residual profits, often paid later in the year. 

Each component: 

• Comes at a different time 

• May be taxed differently 

• Requires close attention for effective personal financial planning 

Before you make any significant spending, saving, or investment decisions, it’s essential to understand the total gross income, the timing of payments and what deductions (e.g. tax reserves or firm-set-asides) will occur before distributions reach you. 

Outcome: Build Clarity into Your Financial Life

By clarifying your true income structure, you can: 

• Avoid nasty tax surprises 

• Forecast your cash flow with more accuracy 

• Build an investment and savings strategy grounded in real-time liquidity 

• Use your current account and capital account wisely 

Don’t let uncertainty around drawings and taxable profits undermine your financial progress. This is where a financial adviser with experience in partnership structures can be invaluable, helping you manage cash flow, tax liabilities and long-term planning with precision. Book a free, 15-minute consultation today.

FAQs

Q: Why am I paying tax on income I haven’t received yet?
A: You are taxed on your allocated share of the LLP’s profits, not the drawings you actually receive. This means taxable income may exceed cash income in any given year. 

Q: What’s the difference between my current account and capital account?
A: Your current account reflects ongoing profit allocations and drawings; it’s fluid. Your capital account represents your long-term investment in the LLP and is usually less accessible. 

Q: Can my current account be overdrawn?
A: Possibly, but this depends on the terms of your LLP agreement. Some firms allow temporary negative balances; others don’t. 

Q: How can I smooth out the impact of variable payments?
A: Create a cash reserve for tax and living expenses, and work with an adviser to map your income across the year. This helps you plan even with irregular payment timings. 

Q: Is my ‘bonus’ guaranteed?
A: No, many performance-based profit allocations depend on individual or team success and firm profitability. Treat them as potential income, not guaranteed. 

Adrian Johnson