Partnership Profit Allocation and Basis Period Reform
Meadow & Co is a trading partnership with two partners, Alan and Beatrice, sharing profits equally. The partnership prepares accounts to 30 June. For the year to 30 June 2025, the partnership's taxable trading profit was £180,000. Alan is a 60% partner? No - the partnership deed says equal shares, but Alan works full-time and Beatrice is a sleeping partner who contributed £200,000 capital. The deed provides for Beatrice to receive a 5% priority return on capital before profits are shared equally. Under the new basis period rules (2024/25 transition), the partnership must align to the tax year. In 2024/25 the partnership had a transitional profit. Alan also has rental income of £40,000 and Beatrice has a salary from an unrelated employer of £90,000.
1. Allocate the partnership profit for 2024/25 between the partners, applying the priority return and the basis period rules.
Read the worked answer
Step 1 - Priority return: Beatrice receives 5% × £200,000 = £10,000 off the top. Remaining profit = £180,000 − £10,000 = £170,000, shared equally: £85,000 each.
Allocation: Alan £85,000; Beatrice £10,000 + £85,000 = £95,000.
Step 2 - Basis period: For 2024/25 (the transition year), the partnership is taxed on the profit of the year to 30 June 2025 plus the transitional amount for the period 1 July 2024 to 5 April 2025 (the gap between the old basis period ending 30 June 2024 and the new tax year). The transitional profit is spread over five years (2024/25 to 2028/29) unless the taxpayer elects to accelerate.
The £180,000 is the current-year profit; the transitional profit is computed separately from the accounts for 1 July 2024–5 April 2025 and added, with spreading. Each partner includes their share of both the current-year profit and the transitional profit in their return.
Note: the priority return is a profit share, not a salary, so it is not deductible in computing partnership profit - it is an allocation of profit.
2. Explain how each partner's other income affects their tax position and any planning points.
Read the worked answer
Alan: Partnership profit £85,000 + rental £40,000 = £125,000 total income. After the personal allowance (tapered: income over £100,000 reduces the allowance by £1 for every £2, so at £125,000 the allowance is £12,570 − £12,500 = £70). He is a higher-rate taxpayer; some income may fall into the additional rate if the transitional profit pushes him over £125,140.
Beatrice: Partnership profit £95,000 + salary £90,000 = £185,000. She is an additional-rate taxpayer (45% above £125,140). Her personal allowance is fully tapered away. The priority return is taxed as trading income, not dividends, so no dividend allowance.
Planning points:
- The transitional profit spreading election: Alan may prefer to accelerate (if he has lower income in later years) or spread (if he expects lower income later). Beatrice, at 45%, may prefer to accelerate into a year when she has capacity - but acceleration increases the current-year burden.
- Consider incorporating the partnership to reduce exposure to 45%? Incorporation triggers CGT and stamp duty land tax on property transfers - model carefully.
- Beatrice's capital contribution could be structured as a loan to the partnership (interest deductible for the partnership, taxed on her) rather than a priority profit share, but the 5% return is already effectively interest-like.
3. What are the compliance obligations and deadlines for the partnership return?
Read the worked answer
- The partnership return (SA800) must be filed by 31 January following the end of the tax year (31 January 2026 for 2024/25) if filed online; paper returns by 31 October 2025.
- The partnership must notify chargeability to tax within six months of the end of the tax year if newly formed.
- Each partner must file a self-assessment return (SA100) with the partnership page (SA104) by the same deadline.
- Payments on account: each partner makes payments on account based on the previous year's liability (50% each on 31 January and 31 July), unless the liability is below £1,000 or 80% is collected at source.
- Penalties: £100 fixed for late filing, then daily penalties after three months, plus tax-geared penalties for late payment.
- The partnership must keep records for at least five years after the filing deadline.
Given the transitional profit, the payments on account for 2025/26 may be based on a high 2024/25 liability - partners should consider a claim to reduce payments on account if the transitional profit was one-off.