Class 2 National Insurance contributions: Small Earnings Exception: Special Groups: Partners’ salaries
Although a partner cannot also be treated as an employee of the business, the partnership agreement may provide for a partner to draw a salary. A partner’s salary is not earnings from employment but an allocation of the self-employed profits. Similarly, partners’ salaries do not count as business expenses; they are a share of the net profit and, where formal accounts are produced, will normally be shown as an extension of the Profit and Loss Account. A percentage of the profit remaining after allocation of salaries may be paid in addition.
A partnership of 2 people might have made profits of £30,000. The agreement is that the profits are allocated equally after payment of a salary of “£20,000 to partner “A”. After deducting the salary, £10,000 profits are to be divided equally giving each partner £5,000. Partner “A” ’s share of the profit is £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 is allocated.