The LLP must produce accounts and file an LLP Tax Return with HMRC, which should include appropriate extracts from the annual accounts. The LLP, on the other hand, does not pay taxes; instead, the gains of the firm are distributed to the members. If there are capital gains, such as from the sale of a home, they are divided among the members based on their profit share.

The partnership agreement determines the exact profit that each member receives, or they receive equal shares if there is no agreement. Each member must then file a self-assessment tax return detailing all of their earnings, including LLP profits, on which they must pay income tax and National Insurance Contributions (NICs) as self-employed persons.

LLPs with sales of more than £81,000 in a calendar year must also register for VAT. If a member is a corporation, it will pay corporation tax on its portion of the earnings, just as it would on any other form of business income.

Members who are not businesses are taxed in the same way as sole traders, general partners, and employees are. Members get a £10,000 personal allowance on which they do not pay income tax. Then, on the following £31,865 in profits, they pay the basic rate of 20%, the higher rate of 40% on profits between £31,865 and £150,000, and the additional rate of 45 percent on profits exceeding £150,000.

National Insurance Contributions are paid in two ways by members (NICs). Class 2 NICs are paid weekly at £2.75, while Class 4 NICs are determined as part of the self-assessment process and are dependent on the member’s salary.

A member’s self-assessment tax return must be submitted online by the 31st of January following the end of the tax year, which is 5 April (paper tax returns must be submitted three months earlier, by 31 October). Taxes outstanding must be paid in full by the 31st of January.

Members, like self-employed sole traders and general partnership partners, must make income tax payments on account. The payment on account is determined using the earnings from the preceding year. It is feasible to negotiate a reduction with HMRC if a member’s income appears to be significantly lower in the following year.

The advantages and disadvantages of trading through a partnership
LLPs combine the ease of use and flexibility of a general partnership with the restricted liability protection of a limited liability corporation. There are no company taxes to pay because all profits go directly to the members. An LLP’s internal agreements and management are confidential, and it has far more flexibility than a corporation.

Because the members’ liability is restricted to the amount they invested, they are not individually accountable for debts or the poor judgments of their business associates like general partners or sole traders. In addition, an LLP might raise funds for expansion by bringing on new members.

However, the administrative burden of administering an LLP is only marginally less than that of running a corporation. Along with tax returns, an annual return and accounts must be completed, and business documents must be retained. Each time a member quits or joins, Companies House must be notified.

When the LLP’s profits reach a particular level, its members will begin to pay higher and additional rate income tax, as well as NICs, on their earnings. A limited company can provide a more tax-efficient structure for extremely profitable firms in certain circumstances.