Sole trader to partership

[Dave S]

Hi there,

I'm new to this forum and I have a couple of questions about changing my business staus from a Sole trader to a partnership.

I am currently operating as a sole trader with my wife helping out informally. Recently my wife has had a baby and now has no source of income so I think I should be making her a partner so that we can use up her tax allowance.

First question is, does the partnership have to pay any fees/taxes (aside from our individual income tax/NIC)

Second question: Do I need to set up a business bank account, or can I continue to use a personal account for business transactions and pay 2 wages, one to me and one to my wife from this personal account?

Third question: Are there any pitfalls/difficulties I should be aware of when changing from sole trader to partnership with regards to tax/legal, or is it just a case of filling in the partnership forms and an extra income tax form for my wife


Anything else I might have missed?

Cheers,
Dave

[Ian J]

You don't need to change your status just to use up your wife's tax allowances as you can just make her an employee.

Joyous will be a long at some stage and she will fill in the blanks for you.

[Dave S]

Thanks, I didn't really consider employment, I assumed that it would be more simple to make her a partner but I'll wait to see what Joyous says. It seems to be just a case of setting up PAYE but there might be more to it, I'm getting confused and stressed about the legal side of things!

Cheers,
Dave

[Joyous]

Hi Dave

There’s nothing to be stressed about. As Ian suggested you’ll be better off making your wife an employee of your business. Pay her up to £96 per week and there’ll be no tax/NI liability. Her salary is an allowable expense thereby reducing your taxable profits and therefore your final tax bill.

If you make her a partner any money she takes will be treated as drawings. Drawings are added back when calculating taxable profits so there’s no benefit there.

Happy to discuss if you feel the need.

Regards

Joy

[Dave S]

Thanks for the reply Joy.

I don't quite understand the bit about drawings. When I try to work it out it seems like a partnership is slightly more (about £130/year) better off but with the advantage that my wife is paying NIC so she gets a pension etc. I'm probably doing something wrong. Here's how I work it out (figures are just approx)

Say my profit is 20k/year (which is pretty optimistic...)

Sole trader with wife as employee leaves me with 15k after the expense of her salary.
0-5000 - my personal allowance
5000-7000 - 10% tax rate - £200
7000-15000 - 22% rate - £1760
Class 2 Nic - £109/year
Class 4 NIC - 5000-15000 @ 8% = 800
No tax or NIC for wife
TOTAL = £2869

Partnership - we take equal share of 20k profit so 10k each. (that is how it works isn't it? )
0-5000 - personal allowance
5000-7000 - 10% - £200
7000 - 10000 - 22% - £660
Class 2 NIC - £109/year
Class 4 NIC - 5000-10000 @8 % = 400
TOTAL EACH = £1369 which is £2738 combined

Sorry to sound stupid, and I expect my calculations have huge holes in them, but why is employment of my wife an advantage over partnership?
Is a partnership a lot more hassle than dealing with PAYE. In fact do I even have to submit anything if she is earning <£96/week?

Thanks again for your help, it reduces the stress when there's a place with people who can point me in the right direction.

[joggyb]

I can't help you with the accounts side of things, but I sense you're still a bit uncertain about what else partnership entails (legally), so here's a very quick outline.

If you set up your business with one or more people, then you will automatically be deemed to be in partnership, whether or not you have agreed anything on paper. This is the case even if the partners are other members of your family, such as your wife.

Without a written agreement to the contrary, your partnership will be governed by the Partnership Act 1890. This is unlikely to be either what you want or need. You should therefore get a Partnership Agreement (often called a deed) drawn up. This should cover how the partnership will work on a day-to-day basis, how it can develop, and how it can be ended, as well as matters such as profit-sharing ratios (which will generally be 50/50 without an agreement, but can be changed by an agreement).

Since you're proposing to go into partnership with your wife, you may not feel that such provisions are necessary, but you'd be surprised. In essence, such an agreement would give you both certainty and peace of mind.

Each of the partners is personally responsible for all the business's liabilities, without limit, whether they knew about them or not. That means creditors can go after your personal assets, such as your house.

Partners remain self-employed and only need to prepare accounts for tax purposes.

I hope this helps. If you need to know anything further, or would like help in drawing up a suitable agreement, please let me know.

[Joyous]

Originally Posted by Dave S

....Here's how I work it out (figures are just approx)

..... and I expect my calculations have huge holes in them.....

Actually Dave your calculation was pretty much spot on when you take into account your rounding of the rates and allowances – you should have been an accountant.

The point I’m trying to make here is that you should make sure that you’re wife’s personal allowances are not wasted by leaving her out of the business. Admittedly you’re slightly better off tax wise going down the partnership route (£161.70 per annum by my reckoning) but this can soon be swallowed by additional accountancy fees as each of you will have to complete individual tax returns as well as a return for the partnership.

Regarding pension entitlements as long as you pay your wife above the lower earnings limit she’ll continue to build towards her state pension entitlement. Sole traders/partners are denied the enhanced state benefits that result from paying Class 1 NIC and the self employed do not build an entitlement towards the second state pension.

Regards

Joy

[Dave S]

Thanks guys. That's much appreciated, I think I know where I stand now. Sorry for not taking your advice in the first place but I just can't settle unless I fully understand the situation!

Cheers again.