As speculation intensifies ahead of the November Budget, Stephen Kenny, Private Client Tax Partner, examines growing rumours that National Insurance Contributions could be extended to partnerships and LLPs, potentially reshaping the tax landscape for professional services.
What is the current tax position with partnerships and LLPs?
At present, partners, both in unlimited partnerships and Limited liability partnerships (LLPs) pay class 4 National Insurance. Broadly, this means they pay 6% on profits over £12,570 up to £50,270 and 2% on profits over £50,270.
Employees pay class 1 National Insurance, broadly at a similar rate to the class 4 paid by partners. However, the key difference is the employer also pays National Insurance at 15% on all earnings (increased from 13.8% from April 2025).
The significant difference is that partners do not pay employers National Insurance on the basis that they are owners of the business and treated as self-employed for tax purposes.
What do we think might be changed?
There are four potential significant changes:
1. Employer NI at 15% could be introduced on partners’ profit shares
2. A Partnership Allowance or Exempt Amount, similar to the Employment Allowance, could be introduced to protect smaller firms. Early suggestions indicate this could apply until profits exceed £90,000 per partner
3. The Government could target LLPs rather than general partnerships, though this distinction raises questions about fairness and avoidance opportunities
4. If introduced, employers NI on LLP profits would be expected to raise between £1.9 billion and £2 billion annually, with the bulk of the burden falling on high-earning professionals such as lawyers, accountants, fund managers, and some medical partnerships.
Why are we taking this seriously?
Think tanks such as Resolution Foundations and CenTax have long advocated for equalising the tax treatment between partners and employees.
It is a straightforward and, on the face of it, a reasonable proposal that similar economic activities be taxed in a similar way.
This change to the treatment of NI on LLPs would align with the repeated call from the Chancellor that “those with the broadest shoulders should bear the biggest burden”.
Politically these seems like a very easy win for the Government.
Is it really that simple?
The increased NI for LLPs could have a substantial impact on the UK professional services sector. For example, an LLP with 50 partners earning £200,000 each could face any additional NIC bill of around £1.5m per a year. This is a huge extra cost to services at a time when businesses are already feeling intense economic pressure.
Whilst there are many similarities between being a partner and an employee, there are substantial differences in operating as a partner:
- Partners have often put their own capital tax risk
- Partnerships are transparent for tax purposes. The cash taken by partners and their taxable profit allocation might be quite different. Often partners will be taxed on more profit that they take from the business as they reinvest profits back into the business. This move would decrease the amount of cash available
- Partners are not employees; they do not have the same protections under law as employees.
In 2014 substantial anti-avoidance rules were introduced to ensure that people being taxed as partners of LLPs were in substance bearing the responsibilities and risks of being a partner. In the guidance published in March 2014, HMRC said about the rules, “This ensures that LLP members who are, in effect, providing services on terms similar to employment are treated as “employees” for tax purposes.”
So, at that time HMRC recognised that there was an economic difference between a partner and an employee, and introduced targeted rules to ensure that people who are economically the same as employees are taxed as employees.
This would imply that the difference between partners and employees is not as straightforward as is being suggested, but is politically very convenient.
What do we think will happen?
It seems very likely that some form of employers National Insurance will be introduced on partnerships including LLPs.
We hope that the Government will take the time to properly consult with the affected sectors to ensure this is done in a way that does not penalise businesses, their clients or employees.
If these changes are introduced without proper consultation and planning it could seriously damage the competitiveness of the UK, which is already feeling the impact of increased Capital Gains Tax.
If you have any questions about the potential impact of the potential changes, please contact Stephen Kenny.
