What to make of the proposed tax raid on UK Partnerships?
The idea of slapping Employer National Insurance (NIC) on professionals who work through limited liability partnerships (LLPs) is moving from political rumour to policy proposal. Reports in the Times and Telegraph – echoed by industry press – suggest that Chancellor Rachel Reeves will use her November Budget to impose a new charge on partners in LLPs (and possibly traditional partnerships) to narrow what she sees as an ‘unfair gap between employees and self‑employed partner's’. This change could raise about £2 billion and would affect roughly 190,000 individuals working in law firms, accountancy practices, GP surgeries and other professional partnerships.
This blog unpacks what’s likely to happen, the tax impact on partners and what planning steps might lessen the blow.
Why is the government targeting LLPs?
At present partners in LLPs are taxed as self‑employed, so they pay self‑employed NIC and are not subject to employer NIC (currently about 15 %). LLPs were designed to allow professionals to work together with limited liability while being taxed like partnerships; they weren’t created as a tax dodge. However, the absence of employer NIC has become a significant advantage: tax analysts estimate that around 0.1 % of taxpayers receive 46 % of partnership income and that 98 % of any new tax would fall on the top 10 % of partners.
Economist Arun Advani, director of the research group CenTax, calls the current exemption “a regressive feature” of the system and argues there is no reason partners should pay less tax than highly paid employees or business owners. With a £30 billion hole in the public finances, Reeves appears to agree.
What’s likely to be announced on 26th November?
The Times reports that Reeves will impose a new charge on LLP members, set slightly below the full employer NIC rate, to “equalise” tax treatment. The Standard adds that more than 13,000 partners earn an average of £1.25 million, while solicitors average £316,000, accountants £246,000 and GPs £118,000. Under proposals modelled by CenTax, a solicitor earning £316,000 could face an extra £23,000 charge, equivalent to about 7.3 % of their income.
It is likely that:
Employer-equivalent NIC will be imposed on LLP income from a set date (probably 6 April 2026). The rate may be marginally lower than the 15 % paid by employers.
The change may initially apply only to LLPs rather than traditional partnerships, but this distinction may be hard to justify.
The Treasury may introduce thresholds or allowances for lower earners (e.g. GP practices) to soften the hit
HMRC will almost certainly create anti‑avoidance rules to stop firms recategorising partners as self‑employed consultants.
How will it affect partners?
Worked example
Imagine Jane, a partner at a mid‑sized law firm structured as an LLP. Her profit share is £316,000 – roughly the sector’s average. Under current rules she pays income tax and self‑employed NIC; she does not pay employer NIC. According to CenTax’s modelling, she takes home about £180,000 after tax.
If employer NIC at 15 % were applied in full, her take‑home would fall to £158,000, an effective tax rise of about £22,000 and a marginal rate jump from 47 % to 54 %. Even if the new charge is set slightly below 15 %, the additional tax will be material.
Higher‑earning partners will be hit harder. TaxPolicy’s calculations show that a partner earning £2 million currently takes home about £1.072 million. Imposing employer NIC reduces that to £934,000, a £138,000 hit and lifts their effective tax rate from 46 % to 53 %.
GPs and other professionals will also be affected. CenTax estimates that the average GP partner earns £118,000 and would see their take‑home pay drop by roughly £6,000.
Broader impacts
Cash‑flow pressure: Partners often finance tax bills personally. A sudden additional levy could strain cash‑flow, especially for younger partners who have recently bought into the partnership.
Behavioural shifts: Some partners may restructure, become self‑employed consultants or even relocate to lower‑tax jurisdictions.
Fee increases: Firms may pass some of the cost to clients, putting upward pressure on professional fees.
Talent retention: Higher tax rates might deter senior professionals from joining or remaining in LLPs. The GDPUK piece notes that economists at the Institute for Fiscal Studies warn that higher taxation could “deter professional investment or drive talent overseas”.
Planning options to counter the tax rises
Although legislation is not yet published, partners and firms can start considering options now. Any planning must be compliant and should be discussed with a professional adviser. Here are some possible responses:
Incorporate the partnership. Converting the firm to a limited company means partners become shareholders and pay themselves a mix of salary and dividends. Incorporation might reduce the impact slightly – saving around £3,000 for a GP and £13,000 for a £2 million partner. However, the greater advantage lies in being able to retain and reinvest profits within the company rather than distributing them all each year.
Use a corporate member. Some partnerships admit a corporate partner which receives part of the profits. The company pays corporation tax (currently 25 %) instead of income tax and NIC, and profits can be retained to fund growth. This may mitigate the new charge, but anti‑avoidance rules could limit benefits.
Salary sacrifice and pension contributions. Partners could reduce profit shares (which would be subject to the new levy) and instead receive employer pension contributions or other tax‑efficient benefits. Contributions to registered pension schemes attract tax relief and aren’t subject to NIC.
Review profit allocations. Firms could equalise drawings or reallocate profit to lower‑earning partners or retired members to reduce the NIC exposure. However, HMRC may challenge arrangements that lack commercial justification.
Explore alternative structures. For some practices, especially where partners are effectively employees in all but name, switching to employment contracts with bonus arrangements may produce a similar net result while simplifying tax.
Consider timing. If the new levy applies from April 2026, there may be scope to accelerate income into the 2025/26 tax year, or to delay capital expenditure until after incorporation so that company tax relief is available.
Monitor the legislation. Details will matter: will there be exemptions for small partnerships or a threshold below which the new levy doesn’t apply? The initial scope may only cover LLPs, but there are strong arguments that applying the charge only to LLPs but not to traditional partnerships or sole traders would be inconsistent.
Final thoughts
Taxing people differently based solely on their business structure creates distortions and resentment. The current system means that partners who are effectively employees in a law firm or GP practice can avoid employer NIC, while salaried staff pay it. It is unsurprising that the Chancellor sees this as an easy revenue grab with populist appeal.
But there are risks. Imposing employer NIC on LLPs could prompt behavioural responses, from restructuring to relocation The policy might also sweep up mid‑income GPs and dentists, harming recruitment in the NHS. And there is a broader question of whether the UK’s continued reliance on high marginal tax rates is compatible with attracting and retaining talent in a global market.
For partners in LLPs, the immediate priority is to model the impact, review structures and take specialist advice. Early planning can mitigate the effect, but there is no avoiding the core truth: if employer NIC is extended to partnerships, net incomes will fall. Professionals need to decide whether to absorb that cost, pass it on, or change the way they operate.
In other words, when the Budget drops, don’t just read the headlines – run the numbers.
