Recent headlines suggest that the Chancellor, Rachel Reeves, may be preparing to significantly increase the amounts of National Insurance Contributions (NICs) paid by members of Limited Liability Partnerships (LLPs).
Whilst this is only one of many “leaks,” which are now customary ahead of big fiscal announcements, this one is widely thought to have some substance.
If true, this leak confirms the Treasury’s intention to bring LLP members more closely in line with traditional employees when it comes to NICs.
If the suggested changes do materialise, this would represent one of the most significant changes to the taxation of professional partnerships in over a decade — and one that could materially affect how many firms structure their affairs.
What’s being proposed?
At this stage, the potential changes are, of course, only rumours, however this leak is somewhat specific in its detail:
- The Chancellor is considering subjecting LLP members to additional “employers’” NICs on their share of partnership profits. Currently employers’ NICs is not payable on LLP profits because LLP members are self-employed, in the same way as partners of traditional partnerships and sole-traders, both of whom do not pay employers’ NIC for the same reason.
- LLP members do already pay Class 4 NICs, which is the equivalent of employees NICs, on their share of partnership profits.
- Strangely, it appears that traditional partnerships and the self-employed may not be subject to these changes.
- The change could be announced in the November 2025 Budget, with implementation potentially from as early as April 2026 (although we would hope to see a longer period before any changes were implemented).
- According to press reports, this could raise around £2 billion per year for the Treasury.
Who could be affected?
These proposals appear to target perceived “tax inequalities” between director/shareholders and partners of LLPs, in particular:
- Professional partnerships – traditionally including law firms, accountancy firms, surveyors, medical practices, and management consultancies.
- High-earning LLP members – for instance, hedge fund managers, who could see a reduction in take-home profits once employer NICs are factored in.
Bizarrely, the government has suggested that the changes would apply only to LLPs and not to traditional partnerships, or to the self-employed.
This decision is thought to relate to the fact that many GP partnerships are structured as traditional partnerships, rather than as LLPs, and for the government to be seen to be taxing doctors heavily again (following some very punitive taxation of doctors’ pensions in recent years), would be a very difficult sell politically – particularly when the Labour party traditionally relies on the votes of healthcare workers to keep it in power.
The decision to subject these changes to LLP members only would seem an odd one if true, as although this is being touted as a “lawyers’ tax,” many legal firms, including some of significant size, with high earning partners (£1m+ per year), are structured as traditional partnerships, and so might not be caught anyway.
Again, this feels like a policy that is being rushed through without sufficient thought.
Why is this happening now?
The announcement follows several weeks of messaging from the Treasury about the need to “rebalance” the tax system.
Rachel Reeves has said that slower economic growth and a worsening fiscal outlook leaves the government with limited options to raise revenue without increasing headline income tax or VAT rates.
LLPs have been under scrutiny for some time, with HMRC arguing that the structure can provide unintended tax advantages compared with employees performing similar roles. This move would align with the government’s broader agenda of closing perceived loopholes and ensuring “fairness” across different forms of work.
Our view
Whilst the government’s focus on fairness is understandable, the proposal risks increasing the tax burden on productive professional firms at a time when many are already facing rising costs.
The detail — such as whether traditional partnerships, or smaller LLPs will be exempt or phased in — will be crucial.
In a world where the Labour government have consistently insisted that they will not raise taxes on working people, quite how they will sell this change as doing anything but that, remains to be seen – although one would expect the messaging to be similar to when employers’ NICs were increased. The government spun this as not being a tax on working people (when clearly it was).
Take, for example, a private medical partnership, structured as an LLP. If the changes are made in the ways that the leaks suggest, the additional tax cost suffered by a doctor would, in effect, be tantamount to a pay-cut – and a significant one at that.
It may well be, and in our view, should be, the case that if these changes are to be made, there should be a threshold up to which the new charges would not bite. This would be a relatively easy fix to a potentially difficult political message to sell – the doctors would be protected, and the hedge fund managers would be caught.
If the proposed changes do materialise, we would expect that firms structured as LLPs may want to consider whether they should change their ownership structure, whether that is converting to a traditional partnership, incorporating, or in the most extreme circumstances, winding up partnership operations and undertaking activities as sole-traders (a partnership and an LLP is effectively a group of two or more sole traders operating together with a view to making profit).
Our message would be to wait for the detail, and to not rush into any decisions to change ownership structures until we are in ownership of all of the facts and individual calculations can be carried out for each business as there will be no “one size fits all” solution to this.
Next steps
We’ll be monitoring the situation closely and will update clients immediately following the Autumn Budget announcement.
If you would like to discuss how the proposed changes could affect your partnership, please get in touch with your usual contact at PM+M or email enquiries@pmm.co.uk to arrange a confidential review.
