What is the tax difference between a partnership and an LLP?

Full answer

An ordinary (general) partnership and a Limited Liability Partnership (LLP) are taxed in essentially the same way - both are tax transparent. Unlike a limited company, the business does not pay Corporation Tax. Instead profits are allocated to the partners or members according to the partnership agreement, and each is taxed personally on their share whether or not the cash is withdrawn. Each partner reports their share through Self Assessment and pays Income Tax at their marginal rate (20%, 40% or 45%), plus self-employed National Insurance: Class 4 at 6% on profits between GBP 12,570 and GBP 50,270 then 2% above, and voluntary Class 2 at GBP 3.65 per week to protect their State Pension record if profits are below the Small Profits Threshold of GBP 7,105. The partnership itself files a partnership return showing the profit split, but pays no tax of its own. Worked example: a two-partner business with GBP 90,000 profit split equally gives each partner GBP 45,000. Each then has their own Personal Allowance of GBP 12,570, pays 20% Income Tax on the rest within the basic band, and Class 4 NI at 6% on profits above GBP 12,570 - identical whether the structure is a general partnership or an LLP. The decisive difference is legal, not fiscal: an LLP is a separate legal body that gives its members limited liability and must file accounts and a confirmation statement at Companies House, while a general partnership offers no liability protection and keeps finances private. Watch the salaried-member rules, which can recharacterise some LLP members as employees subject to PAYE. Anti-avoidance rules can also reallocate profits in mixed partnerships involving a corporate partner. Use the self-employed tax calculator to estimate each partner's Income Tax and National Insurance on their profit share.

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