There are a number of key tax and legal differences to consider when your status changes from that of an employee to becoming a partner in a partnership.
The following table highlights some of the key differences.
| EMPLOYMENT (EMPLOYEE) | PARTNER (SELF- EMPLOYED) | |
| Risk, Control and Legal Position | Employees will have an employment contract that confirms the number of hours to work and their rate of pay and a defined role within the business etc. They will benefit from statutory rights such as: Unfair dismissal protection Redundancy rights Sick pay and holiday pay The employer is responsible for compliance with employment law, and they will have no personal exposure to the business’ liabilities. | Partners are governed by the partnership agreement in place and by the Partnership Act 1890. Partners will have a share of both the profits and losses of the business. In a general partnership partners will have unlimited personal liability whereas in a Limited Liability Partnership (LLP) liability is generally limited to the capital invested. |
| Basis of taxation | The individual (employee) will pay income tax and National Insurance Contributions (NIC) on their earnings received from their employer. You are taxed on employment income when it is paid to you during the tax year. | The partner will pay income tax and National Insurance Contributions (NIC) on the taxable profits allocated to them from the partnership regardless of if you have drawn the profits or retained them within the partnership. From the 2023/24 tax year onwards you are taxed on profits that are allocated to you that arise in the tax year rather than the accounting period. See basis period reform below for more detail. |
| Income Tax Rates | The same income tax rates that apply to employment income apply to profits from a partnership. As of 2026/27 the rates are as follows and are frozen until April 2031: Personal allowance- £12,570(subject to tapering from £100,000) Basic rate 20% up to £50,270 Higher rate 40% to £125,140 Additional rate 45% £125,140 onwards. | The same income tax rates that apply to employment income apply to profits from a partnership. As of 2026/27 the rates are as follows and are frozen until April 2031: Personal allowance- £12,570(subject to tapering from £100,000) Basic rate 20% up to £50,270 Higher rate 40% to £125,140 Additional rate 45% £125,140 onwards. |
| National Insurance | As an employee, you are subject to Class 1 NIC. The rates for the 2026/27 tax year are: If you earn more than £242 a week and up to £967 a week, you pay 8% of the amount you earn between £242 and £967If you earn more than £967 a week, you also pay 2% of all your earnings over £967. Your contributions are deducted from your wages by your employer. | As a partner, you are subject to pay two classes of NIC, Class 2 and Class 4. The rates for the 2026/27 tax year are: Class 2 NIC if your earnings are over £6,725 in the year Class 2 is treated as paid and contributes toward your NIC record. If your profits are less, you can voluntarily pay a flat rate of £3.65 a week (2026/27). Class 4 NIC is paid as a percentage of your annual taxable profits – 6% on profits between £12,570 and £50,270, and a further 2% on profits over that amount (2026/27). |
| Reporting requirements | As an employee, you may not need to file a self-assessment tax return with HMRC. If you do need to file a self-assessment tax return (for example, if you have other sources of income, or earn over £150k in a tax year) you will need to register for self-assessment by completing form SA1. Currently, self-assessment tax returns are due each year by 31 January. You will have income tax and NICs withheld at source from your wages in the form of Pay As You Earn ‘PAYE’. Amount received is net of tax and NIC only responsibility is to ensure tax codes are correct. | Partners will have to file a self-assessment tax return with HMRC. Form SA401 should be completed by an individual becoming a partner in a partnership. Currently, partnership tax returns are due each year by 31 January, however in practice they commonly need to be submitted in advance of this to ensure the individual members have the data available in time for their own self-assessment tax returns. As a partner, PAYE will no longer apply (unless the salaried member rules for LLPs apply). Drawings from the partnership are made before tax and NIC is collected it is therefore important partners keep aside enough to settle the tax liabilities. Currently, self-assessment returns are due by 31 January each year, and payments on account must be made twice a year for the current tax year: On 31 January within the tax year; and on 31 July, after the tax year ends. |
Basis period reform
The basis period rules have been repealed, and partnership profits will instead be assessable based on profits arising within a tax year. This will have the following impact:
- From 2024/25, partnership profits will be taxed based on the profit made in that tax year.
- The tax year 2023/24 was a transitional year in which those with non-aligning accounting periods had to include additional profits to catch up with the tax year.
- Individuals had the option to spread the additional profits tax in the year which are known as transitional profits over the next 5 years. It is therefore important for partners to factor this in when setting aside monies for their tax liability.
- If the accounting period for the partnership has not changed to 31 March or 5 April, then profits will need to be apportioned each year going forwards for the partnership tax return. This presents a problem if you only have estimated profits for the second accounting period that you are apportioning.
EXAMPLE
- Say you have an accounting year end of December. For the 2026/27 tax year, the profits charged to tax will be:
- 6 April 2024 – 31 December 2026: 270/366ths of your December 2026 profits, plus
- 1 Jan 2025 – 5 April 2025: 95/365ths of your December 2027 profits
- It is likely that by the time you need to submit your 2026/27 tax return (by 31st January 2028) you may not have your December 2027 partnership accounts finalised.
- In this scenario, you would need to submit estimated figures in your tax return, then amend it when you know the December 2025 profits from your partnership.
Making Tax Digital (MTD) In the future?
Currently partnership and income from them is not within the scope of MTD however HMRC have indicated that in future they will look to include partnership income. They have not provided a timeline or whether the partnership or the partners will be required to make the quarterly submissions.
However, partners may still be caught by MTD if they exceed the thresholds from other sources of income such as other self-employments and/or rental income. Currently the threshold for MTD is £50,000 from April 2026 which reduces to £30,000 from April 2027 and then £20,000 from April 2028.
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