Partnership - What is the difference between a GP’s drawings and profit?

A partnership is a business that is owned and managed by more than one person. All partners are jointly responsible for all aspects of the business and are entitled to a share of the partnership profits. Legally, the partners are the partnership and, unless the partnership is set up as an LLP, the partners are jointly and severally liable. The amount of profit each partner is allocated is determined and agreed by a partnership agreement. If you don’t have a written partnership agreement, your partnership is governed by the Partnership Act 1890.

Each individual partner is set up with a current account through which profit is added and drawings are deducted. Separate accounts may also be set up and included within the partnership’s accounts for the capital of the business. These accounts can cover the ownership of the non-current assets and working capital requirements of the business. Partners can buy into the capital requirements by introducing money to the partnership, or via undrawn profits.

What are drawings?

Drawings are amounts taken from the partnership, by each partner, usually monthly and occasionally on an ad hoc basis. They’re essentially the partners ‘salary’, a payment on account of profits earned. The drawings are a withdrawal of capital from the business and don’t affect the computation of profit on which a partner will pay income tax.

The amounts taken are recorded in a drawings account within the accounting records. Each partner will have their own drawings account and it’s essential that detailed and accurate records are kept of the drawings that are taken.

The amount drawn by each partner per month, like the profit shares, will be agreed in accordance with the partnership agreement. These will vary between partner and partnership depending on things like the number of partner sessions worked and the previously agreed profit-sharing ratios.

Other items that may be included in drawings are if the partnership pays the partners personal tax liabilities or professional subscriptions as well as superannuation contributions.

What is income tax calculated on?

It’s important to point out that drawings aren’t a deduction against the partners taxable profits. Even if an individual takes no drawings from the partnership for the whole year, the tax due on their profit share would be the same as if they had taken monthly drawings.

Income tax is assessed on the individual’s share of the taxable partnership profits. Taxable profit isn’t always the same as the profit allocated to an individual in the accounts. This is because expenses like depreciation aren’t an allowable expense for tax purposes and so are added back to profits and instead the partnership is entitled to capital allowances. Examples of other expenses which aren’t allowable are legal fees incurred in relation to drawing up partnership agreements, property valuations and renewals of leases which exceed 50 years, entertaining, and fines (for example parking fines).

Any personal business expenses incurred that exclusively relate to the partnership business can be deducted from an individual’s share of the partnership profit to reach their taxable profit. These expenses are recorded as personal expenses. A business use percentage of capital allowances can also be claimed on any assets purchased for use in the partnership such as cars and mobile phones.

An accountant will calculate the deductions when preparing the accounts and tax returns and individuals will be required to provide details of all expenses incurred throughout the year.

Unless the partnership pays for an individual’s income tax, they will need to save for their income tax from their partnership drawings and so it’s important that drawings are calculated accurately.

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George Crowe