How Do Partners in a Law Firm Get Paid for Tax Purposes

At Towerstone Accountants we provide specialist accountancy services for solicitors and law firms operating under SRA regulation. This article has been written to explain How do partners in a law firm get paid for tax purposes in clear practical terms so you understand how the rules apply in day to day practice. Our aim is to help you stay compliant protect client money and make informed financial decisions.

This is one of the most common areas of confusion I see when working with solicitors and law firms. Partners often talk about being “paid” in the same way employees do but for tax purposes that is not how the system works. Misunderstanding this distinction leads to poor cash flow planning, unexpected tax bills, and in some cases real compliance problems.

In this article, I am going to explain clearly and practically how partners in a law firm are paid for tax purposes in the UK. I will cover how partner income is treated, how tax is calculated and paid, what drawings really mean, how LLPs differ from traditional partnerships, and where I see firms go wrong most often. Everything here reflects real world UK practice and current guidance rather than theory.

The key principle partners need to understand

The most important thing to grasp is this.

Partners are not employees of the firm.

For tax purposes, partners are treated as self employed individuals who are taxed on their share of the firm’s profits, not on the amounts they physically withdraw from the business.

This single point underpins everything else and yet it is frequently misunderstood.

Whether you are a partner in a traditional partnership or an LLP, the starting position is the same. You are taxed on profit allocation, not drawings.

How partnerships and LLPs are treated for tax

Most UK law firms operate as either:

• Traditional partnerships

• Limited liability partnerships

From a tax perspective, both are treated in broadly the same way.

The partnership or LLP itself does not usually pay income tax. Instead, the profits are calculated at firm level and then allocated to the partners in line with the partnership or LLP agreement.

Each partner then pays tax personally on their share.

The partnership or LLP submits a partnership tax return showing:

• Total firm profits

• How those profits are split

• Each partner’s profit share

Those figures then feed into each partner’s personal Self Assessment tax return with HM Revenue and Customs.

Profit share versus drawings

This is where confusion often sets in.

A partner’s profit share is the amount they are taxed on.

Drawings are simply amounts taken out of the firm during the year.

They are not the same thing.

For example, a partner might:

• Be allocated £150,000 of profit for the year

• Take drawings of £100,000 during the year

• Leave £50,000 in the firm

For tax purposes, that partner is still taxed on the full £150,000.

Equally, a partner could take drawings of £150,000 while only being allocated £120,000 of profit. In that case, the extra £30,000 is not income. It is effectively an advance against future profits or it creates an overdrawn position that must be addressed.

Understanding this distinction is essential for cash flow planning.

How partners actually receive money

In practice, partners usually receive money from the firm in the following ways:

• Regular monthly drawings

• Ad hoc additional drawings

• Profit distributions after year end

• Occasionally fixed drawings with a year end true up

These payments are not salary. There is no PAYE and no payslip in the usual sense.

The firm does not deduct income tax or National Insurance at source. Responsibility for paying tax rests with the partner personally.

This is why partners need to be disciplined about setting money aside for tax.

Income tax and National Insurance for partners

Partners are taxed as self employed individuals.

This means they pay:

• Income tax on their profit share

• Class 2 National Insurance

• Class 4 National Insurance

The rates depend on the level of income and the tax year in question but the key point is that the tax burden can be significant.

Unlike employees, partners do not benefit from employer National Insurance contributions. The trade off is flexibility and often higher earning potential but it does mean tax planning is critical.

When partners pay their tax

Another area that often catches people out is timing.

Partners usually pay tax through the Self Assessment system which involves:

• A balancing payment by 31 January following the end of the tax year

• Payments on account on 31 January and 31 July

This means that in the early years of partnership, tax payments can feel particularly heavy because you are effectively paying tax for the first year and making advance payments for the next year at the same time.

This is one of the reasons new partners often feel under financial pressure despite good headline profits.

Fixed share and equity partners

Not all partners are treated identically within a firm.

Many law firms distinguish between:

• Fixed share partners

• Equity partners

From a tax perspective, both are still taxed as partners if they genuinely meet the criteria for partnership. However, the way profits are allocated can differ.

Fixed share partners may receive a relatively stable profit allocation with limited exposure to fluctuations. Equity partners usually share more directly in overall profits and risks.

What matters for tax is not the label but the substance of the arrangement. HMRC will look at whether someone is genuinely a partner or effectively an employee in disguise.

Salaried partners and tax risk

The concept of a “salaried partner” causes frequent confusion.

In many firms, salaried partners receive a fixed amount each year and may feel like employees. However, if they are legally partners and share in profits or losses to any degree, they are usually still taxed as self employed.

There are situations where HMRC may argue that a so called salaried partner is actually an employee. This depends on factors such as:

• Level of risk

• Profit participation

• Decision making power

• Capital contribution

Getting this wrong can lead to serious tax and National Insurance issues for both the firm and the individual. This is an area where specialist advice is essential.

Capital accounts and tax

Partners often contribute capital to the firm when they join.

This capital sits in a capital account and is not taxable income.

Similarly, repayment of capital is not taxable provided it is genuinely a return of capital and not disguised profit.

However, capital accounts interact with drawings and profit allocations so it is important that records are clear and up to date. Poor capital accounting is a common source of disputes and confusion.

How LLPs handle profit allocation

In LLPs, profit allocation is often more flexible than in traditional partnerships.

Many LLP agreements include:

• Fixed profit shares

• Variable profit pools

• Performance based allocations

• Lockstep arrangements

From a tax perspective, the principle remains the same. Whatever profit is allocated to the member is taxable on them personally regardless of how much cash they actually receive.

LLPs also have additional rules around disguised employment which must be considered carefully.

Disguised employment rules for LLP members

The disguised employment rules are designed to prevent individuals who are effectively employees from being taxed as self employed partners.

Broadly, if an LLP member:

• Has a fixed level of remuneration

• Bears little or no financial risk

• Has limited influence over the business

They may be treated as an employee for tax purposes.

This would mean PAYE and employer National Insurance apply.

Many law firms structure arrangements specifically to ensure members fall outside these rules. This needs careful drafting and ongoing review as roles and profit shares change.

Planning for tax as a partner

One of the biggest mistakes partners make is treating tax as an afterthought.

Good planning involves:

• Setting aside money for tax regularly

• Understanding payments on account

• Reviewing profit forecasts

• Considering pension contributions

• Timing large drawings carefully

Partners who plan properly rarely feel surprised by their tax bills. Those who do not often find themselves under pressure.

Common mistakes I see in practice

Over the years, I see the same issues repeatedly when reviewing partner tax affairs.

These include:

• Assuming drawings are taxed instead of profits

• Failing to budget for payments on account

• Overdrawing without understanding the implications

• Confusing capital repayments with income

• Not reviewing partnership agreements from a tax perspective

• Leaving tax planning too late in the year

None of these are unusual. All of them are avoidable with the right advice.

How accountants support partners

A good accountant does far more than prepare tax returns.

For partners in law firms, accountants help by:

• Explaining how profit allocation works in plain English

• Forecasting tax liabilities

• Advising on drawings levels

• Reviewing partnership and LLP agreements

• Identifying planning opportunities

• Acting as a buffer between partners and HMRC

This support is particularly valuable in growing firms where profit patterns can change quickly.

Final thoughts

Partners in law firms are paid in a very different way to employees and that difference matters enormously for tax.

You are not taxed on what you take out. You are taxed on what you are allocated.

Once that principle is properly understood, many of the common frustrations and surprises fall away. Cash flow planning becomes easier, tax bills become predictable, and discussions within the firm become more informed.

In my experience, partners who take the time to understand how their income is taxed are far more confident and far less stressed. The rules are not designed to catch people out but they do require engagement.

If you treat partnership income with the same care as you treat your clients’ affairs, you put yourself in the strongest possible position.

You may also find our guidance on What are the tax implications of becoming a law firm partner and How do solicitors handle partner loans and capital accounts useful when reviewing related SRA and accounting obligations. For a broader overview of solicitor accounting and compliance topics you can visit our solicitors accounts rules hub which brings all related guidance together.