Partners are taxed on the profit allocated to them, drawn or not, at a marginal cost of 42% and then 47% — and then asked for it again in advance every 31 January and 31 July. Here is how to take money out of a law firm without a January surprise.
Partners rarely get caught out by the rate. They get caught out by the stacking. A profit share carries income tax and Class 4 national insurance, and then payments on account ask for next year's tax before next year has happened. Add a firm that has grown, thresholds frozen until 5 April 2031, and — for any firm that used to have a non-March year end — a slice of transition profit still landing each year, and January stops being a date and becomes an event.
None of that is unpredictable. All of it can be reserved for monthly. What makes it painful is finding out the number in January instead of in July.
The arithmetic
A partnership or LLP is transparent: the firm files a return but pays no tax, and each partner — including each LLP member — is taxed personally on their allocated share. Two charges apply to the same profits.
Income tax for 2026/27, from 6 April 2026, runs at 20% on the first £37,700 of taxable income, 40% from £37,701 to £125,140, and 45% above that. The personal allowance is £12,570, giving a higher-rate threshold of £50,270, and it tapers by £1 for every £2 of income above £100,000. Those thresholds are frozen until 5 April 2031, which means real profit growth pushes partners up the scale every year without any rate ever changing.
Class 4 national insurance applies to each partner's own share of the firm's trading profits at 6% between £12,570 and £50,270 and 2% above £50,270.
Stack them and the marginal cost of the next pound of profit share is 42% above £50,270 and 47% above £125,140 — with the £100,000 to £125,140 band worse than either, because the tapering personal allowance adds an effective charge on top. A partner reserving "about 40%" is under-reserving, every year, by a little.
Payments on account fall due on 31 January and 31 July, each normally half of the previous year's liability. In a growing firm they are always chasing a bigger number, so the January payment is the balance for the year just filed plus the first instalment for the year in progress.
Illustrative only, on 2026/27 rates and ignoring anything other than the profit share. A solicitor becomes an equity partner and their first full year produces a profit share of £95,000. Income tax on that is about £25,400 and Class 4 national insurance about £3,150, so the liability is roughly £28,550. There were no payments on account for that first year, because payments on account are based on a prior year that did not exist. So on 31 January they pay the £28,550 in full, plus a first payment on account of about £14,275 for the following year — around £42,825 in one day. On 31 July a further £14,275 falls due. That is roughly £57,100 inside seven months. Nothing has gone wrong. It simply needed to be known about eighteen months earlier.
Still running
Basis period reform moved all unincorporated businesses onto a tax-year basis from 2024/25, with 2023/24 as the transition year. Where a firm had a year end other than 31 March or 5 April, that transition produced extra profit after overlap relief — and that transition profit is spread over five tax years, 2023/24 to 2027/28, with at least 20% taxed in 2023/24 and the remainder spread equally across the four years that follow.
So for a great many law firm LLPs there is still a slice landing in 2026/27 and again in 2027/28, on top of the year's own profit. It is a live cash-flow item for partner tax reserves right now, and it is easy to miss because it does not appear anywhere in the firm's own accounts.
One trap worth naming: if the business ceases on or before 5 April 2027, all remaining untaxed transition profit is taxed in the year of cessation. That turns a spread liability into a single bill, and it is precisely the kind of thing that surfaces halfway through a merger or a retirement rather than before it.
Drawings
Drawings are not a taxable event. Taking money out of the firm does not create the tax charge and leaving it in does not avoid it — a member is taxed on the allocated share whether or not it is drawn. That single fact is behind most partner cash-flow trouble, because a firm that retains profit to fund work in progress hands its partners a tax bill on money that is still sitting in lockup.
What works is dull and it works reliably:
Run your own numbers with the partner drawings and tax calculator: profit share in, tax reserve and sustainable monthly drawings out, including the payments on account that catch new partners.
Each partner's self assessment prepared from the firm's own figures, so the profit share in the partnership return and the one on the personal return are the same number.
A monthly tax reserve figure per partner at the real 42% or 47% marginal cost, with the personal allowance taper and payments on account built in.
Sustainable monthly drawings tested against expected profit share and the firm's cash, not against what happens to be in the office account.
Both payment dates forecast well in advance, including the transition profit slices still running to 2027/28.
The tax calendarThe second-year cliff worked out before somebody takes the equity step, together with what capital contribution and the salaried members rules mean for them.
LLPs and partnershipsWhether 42% and 47% on undrawn profit still makes sense for your firm, against corporation tax and the April 2026 dividend rates.
LLP vs limited companyA partnership or LLP is transparent for tax. The firm files a partnership return but pays no tax itself; each partner or member is taxed personally on their allocated share of the profit through self assessment. That share carries income tax at 20%, 40% or 45% depending on total income, and Class 4 national insurance on the same trading profits — 6% between £12,570 and £50,270 and 2% above that. LLP members are in exactly the same position as partners in a traditional partnership for this purpose. The tax is due on the allocated share whether or not the money was ever drawn.
Higher than most partners think, because income tax and Class 4 national insurance stack. Above £50,270 a partner pays 40% income tax plus 2% Class 4, so the marginal cost of the next pound of profit share is 42%. Above £125,140 it is 45% plus 2%, so 47%. Between £100,000 and £125,140 it is worse still, because the £12,570 personal allowance tapers away at £1 for every £2 of income, producing an effective rate well above the headline. The income tax thresholds are frozen until 5 April 2031, so rising profits push more of every partner's share into those bands each year.
Because payments on account arrive on top of a full year's liability. In the first year as a partner there are usually no payments on account, since they are based on the prior year's bill, so the whole liability falls due on 31 January. That same 31 January then carries the first payment on account for the following year, normally half of the liability just calculated, and a second payment follows on 31 July. The effect is that a new partner can face something close to one and a half years of tax within seven months. It is arithmetic, not a mistake, and it is entirely predictable in advance.
On the profit share. Drawings are simply the movement of money out of the firm and are not themselves a taxable event. A member is taxed on the profit allocated to them whether or not it was drawn, which is why a firm that retains cash to fund work in progress can leave its partners with a tax bill on money they have never seen. The practical answer is a drawings policy that runs on a monthly figure clearly below the expected profit share, with a tax reserve held separately and a balancing distribution once the year is agreed.
For many firms, yes. Where a firm had a year end other than 31 March or 5 April, the transition year of 2023/24 produced additional profit after overlap relief, and that transition profit is spread over five tax years from 2023/24 to 2027/28, with at least 20% taxed in 2023/24 and the remainder spread across the following four years. So a slice is still landing in 2026/27 and again in 2027/28. If the business ceases on or before 5 April 2027, all untaxed transition profit becomes taxable in the year of cessation, which matters a great deal in a merger or a retirement.
A free conversation about your profit shares, your reserves and your drawings policy. We will show you each partner's real marginal cost and what a sustainable monthly figure looks like.
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