NIM21021 | Class 2 National Insurance Contributions: Small Earnings Exception: Special Groups: Partners’ salaries

Although a partner could not also be treated as an employee of the business, the partnership agreement could provide for a partner to draw a salary. A partner’s salary was not earnings from employment but an allocation of the self-employed profits. Similarly, partners’ salaries did not count as business expenses; they were a share of the net profit and, where formal accounts were produced, would normally be shown as an extension of the Profit and Loss Account. A percentage of the profit remaining after allocation of salaries could be paid in addition.

Example

A partnership of 2 people made profits of £30,000. The agreement was that the profits were allocated equally after payment of a salary of “£20,000 to partner “A”. After deducting the salary, £10,000 profits were to be divided equally giving each partner £5,000. Partner “A” ’s share of the profit was £25,000 (salary £20,000 + £5,000) and “B” ‘s £5,000. If the partnership had only made a profit of £8,000, partner “A” would be allocated all the profit because of the agreement that he or she was due a salary of £20,000 before the net profit was allocated.