How Do UK Solicitors Prepare Partnership Accounts for 2025/26?

If you are a partner in a UK law firm structured as a general partnership or an LLP, preparing partnership accounts for 2025/26 requires a clear understanding of how profit is allocated, how each partner's tax position is calculated, and how the partnership tax return (SA800) is filed. This guide explains the process step by step, using realistic figures for a typical four-partner firm.

Why Partnership Accounts Differ from Company Accounts

A limited company pays corporation tax on its profits and then distributes dividends to shareholders. A partnership or LLP is different. The partnership itself does not pay tax on its profits. Instead, each partner is taxed individually on their share of the partnership's profits, at their own personal income tax rates and National Insurance contributions.

This means the partnership accounts serve two distinct purposes. First, they show the financial performance of the firm as a whole. Second, they provide the data needed to prepare each partner's personal tax return, including the partnership pages (SA800) and the partner's own self-assessment.

For solicitors, the structure of the firm also affects how client money is handled under the SRA Accounts Rules. The partnership accounts must be prepared alongside the client account reconciliations, which are typically done every five weeks. A COFA will usually oversee this process to ensure compliance.

Step 1: Agree the Profit-Sharing Ratio

Before any accounts can be prepared, the partnership agreement must specify how profits (and losses) are shared. Common models include:

• Equal sharing all partners receive the same percentage.
• Points-based each partner gets a number of points, and profit is divided proportionally.
• Salaried plus share fixed-share partners receive a fixed amount, and equity partners split the remaining profit.

For example, consider a four-partner firm with total partnership profit of £600,000 for the year ended 5 April 2026. The partners agree the following split:

• Partner A (senior equity partner): 35% = £210,000
• Partner B (equity partner): 30% = £180,000
• Partner C (fixed-share partner): £80,000 fixed
• Partner D (fixed-share partner): £70,000 fixed

The fixed-share partners receive their amounts first. The remaining profit of £450,000 (£600,000 minus £150,000) is then split between the two equity partners according to their percentage shares. This is a common structure in many law firms.

If the firm is an LLP, the same principles apply. However, you must also check the Salaried Member Rules (FA 2014). If a fixed-share partner meets all three conditions (disguised salary of 80% or more of total reward, limited influence over the LLP's affairs, and capital contribution less than 25% of disguised salary), they are treated as an employee for tax purposes. PAYE applies on their drawings. This is a common trap for solicitors in LLPs who assume all members are self-employed for tax.

Step 2: Adjust Accounting Profit to Taxable Profit

The profit shown in the partnership accounts is usually prepared under UK GAAP (FRS 102 or FRS 105). However, HMRC requires adjustments to arrive at the taxable profit. Common adjustments for a law firm include:

• Depreciation not allowable. Instead, capital allowances are claimed on qualifying assets (computers, office equipment, furniture). The Annual Investment Allowance (AIA) is £1,000,000 for 2025/26, so most firms can claim full relief on new assets in the year of purchase.
• Client entertaining not allowable (except staff entertaining).
• Professional Indemnity Insurance (PII) allowable as a trade expense. Premiums are fully deductible.
• Interest on partner capital if the partnership pays interest on partners' capital accounts, this is not deductible in computing partnership profits. It is treated as a division of profit.
• Partner salaries if the partnership pays a salary to a partner (not an employee), this is also a profit allocation, not a deductible expense.

For the example firm, suppose the accounting profit is £620,000, but this includes £20,000 of depreciation and £5,000 of client entertaining. The taxable profit becomes:

£620,000 + £20,000 (depreciation added back) + £5,000 (entertainment added back) minus £15,000 (capital allowances claimed) = £630,000.

This £630,000 is the figure that goes into the partnership tax return (SA800) and is then allocated to partners according to their profit-sharing ratio.

Step 3: Prepare the Partnership Tax Return (SA800)

The partnership must file an SA800 return with HMRC by 31 January following the end of the tax year. For the 2025/26 tax year, the deadline is 31 January 2027. The return includes:

• The partnership's total taxable profit (or loss).
• A breakdown of each partner's share of profit, including any notional adjustments for capital allowances or balancing charges.
• Details of any partnership property or investments.
• The partnership's accounting date (usually 31 March or 5 April for most law firms).

Each partner also receives a partner statement from the partnership. This statement shows their share of profit, any drawings taken during the year, and the balance on their capital account. The partner uses this statement to complete their own self-assessment tax return, including the partnership pages (SA104).

For the example firm, the partner statement for Partner A would show:

• Share of partnership profit: £210,000
• Drawings taken during the year: £180,000
• Capital account balance at 5 April 2026: £30,000 (assuming opening balance of £0)

Partner A then reports £210,000 on their personal tax return. They pay income tax at their marginal rate (40% or 45%) and Class 4 NIC at 6% on profits between £12,570 and £50,270, and 2% above that. They also pay Class 2 NIC (abolished from April 2024, so no charge for 2025/26).

Step 4: Allocate Drawings and Tax Payments

Partners typically take drawings throughout the year, often monthly. These drawings are not salary; they are advances against the partner's expected profit share. At the year end, the drawings are compared to the actual profit share. Any excess drawings become a loan from the partnership to the partner, which must be repaid or adjusted in the following year.

Tax on partnership profits is paid by each partner personally through the self-assessment system. Partners make payments on account (usually 31 January and 31 July) based on the previous year's tax liability. For the 2025/26 tax year, the balancing payment is due by 31 January 2027.

Many law firms encourage partners to set aside a proportion of each drawing for tax. A common approach is to save 30-40% of drawings for higher-rate taxpayers. For Partner A with a profit share of £210,000, the tax bill (assuming no other income) would be approximately:

• Personal allowance: £12,570 (tapered to £0 as income exceeds £100,000, so no allowance).
• Basic rate: £37,700 at 20% = £7,540
• Higher rate: £74,870 at 40% = £29,948
• Additional rate: £84,860 at 45% = £38,187
• Class 4 NIC: £37,700 at 6% = £2,262, plus £159,730 at 2% = £3,195
• Total: approximately £81,132

This is a significant sum. Partners should plan their cash flow carefully and consider using a partnership vs LLP take-home calculator to model their tax position.

Step 5: File the Partnership Return and Partner Returns

The partnership tax return (SA800) is filed online through HMRC's portal or via commercial software. The partnership must also provide each partner with a partnership statement by 31 January following the end of the tax year. This is not a legal requirement but is standard practice and essential for partners to file their own returns correctly.

Each partner then files their own self-assessment tax return, including the partnership pages (SA104). The partner reports their share of profit, any notional adjustments, and any capital gains from the partnership. The partner also reports any interest or dividends from partnership investments.

For solicitors in LLPs, the process is identical. However, remember that if any member is treated as an employee under the Salaried Member Rules, their drawings are subject to PAYE and NIC through the firm's payroll. The partnership accounts must reflect this correctly, and the member's partner statement will show a notional profit share that is then adjusted for the PAYE treatment.

Common Pitfalls for Solicitors Preparing Partnership Accounts

1. Misunderstanding the Salaried Member Rules

As noted above, fixed-share partners in LLPs can be reclassified as employees for tax purposes. If you have a fixed-share partner who receives 80% or more of their total reward as a fixed sum, has limited influence over the LLP's affairs, and has a capital contribution of less than 25% of that fixed sum, you must operate PAYE on their drawings. Many law firms get this wrong and face HMRC penalties.

2. Incorrect Treatment of Client Money

Partnership accounts must not include client money held in the client account. Client money is not the firm's money and must be excluded from the profit and loss account and balance sheet. The SRA Accounts Rules require a separate client ledger and regular reconciliations. A COFA should review this annually.

3. Failing to Account for Work in Progress (WIP)

Under FRS 102, law firms must recognise WIP on an earnings basis once revenue is reliably measurable. This means unbilled time at the year end must be valued and included in the accounts. Many firms undervalue WIP, which understates profit and can lead to incorrect partner profit shares. For a firm with significant litigation or conveyancing work, WIP can be a large balance sheet item.

4. Ignoring the Impact of Drawings on Capital Accounts

Partners often treat drawings as a simple cash outflow. But if a partner draws more than their profit share, the capital account becomes negative. This is a loan from the partnership to the partner, and it may need to be repaid or adjusted. Some partnership agreements require interest on overdrawn capital accounts, which is a further profit allocation.

5. Late Filing of the Partnership Return

The SA800 return must be filed by 31 January following the end of the tax year. Late filing attracts a penalty of £100 initially, then escalating. For a partnership with multiple partners, late filing can also delay each partner's personal tax return, causing further penalties. Use a specialist LLP accountant to ensure timely filing.

How a Specialist Solicitor Accountant Can Help

Preparing partnership accounts for a law firm is not the same as preparing accounts for a general business. The interaction between partnership tax, the SRA Accounts Rules, and the specific profit-sharing arrangements of solicitors requires specialist knowledge. A general accountant may miss the nuances of the Salaried Member Rules, WIP valuation, or client money treatment.

At Accounts for Lawyers, we work exclusively with UK solicitors and law firms. We prepare partnership accounts, partner statements, and SA800 returns that are accurate and compliant. We also provide ongoing support to COFAs and COLPs on regulatory matters.

If you are a partner in a law firm and need help with your partnership accounts for 2025/26, contact us for a consultation. We can review your current arrangements, identify any compliance gaps, and ensure your partnership tax return is filed correctly and on time.