Bringing managers into the partnership: the tax benefits

TaxTalk - February 2023

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Partnerships are common among professional services providers such as law firms and accountants, but they’re increasing in other sectors too. We look at the tax implications for partners versus employees.

Partnerships are useful for businesses with a large number of owner/managers. The introduction of Limited Liability Partnerships (LLP) gave partnerships broadly the same limited liability protection as limited companies. So the choice between limited company and LLP depends on the aims and aspirations of the business. In this article we focus on businesses structured as LLPs, and we use the terms partnership and LLP to mean the same.

A limited company and an LLP share most of the same running formalities, such as preparation of annual accounts. But one fundamental difference is that a partnership is transparent for tax purposes. This means the members are directly taxable on the profit of the partnership as it arises, whereas a limited company is opaque for tax purposes.

Introduction of the new member

Growth, or promoting an employee to partner, is always exciting news for a business and for that person’s career. So what are the implications of admitting someone from the management team as a member of the LLP, both for the partnership and for the individual?

Partners are not considered employees in law, even though in practice the position of many partners at larger professional services firms can in many ways be akin to employment. They are therefore not protected under unfair dismissal legislation. But they do benefit from important protections under discrimination and whistleblowing legislation.

But what about tax? The introduction of a new member of the LLP, and the resulting changes in profit shares, usually won’t give rise to a tax liability on the individual involved. By contrast, giving an employee equity in a limited company would be considered a taxable event under the employment-related securities regime. So it would be possible to promote a member of the management team to partner without triggering a dry tax charge.

Implications for the partnership

A partnership bears no tax itself. Instead, all the tax is paid by the member of the LLP.

There is an advantage for the partnership of having a member instead of employee. When someone is partner there is no PAYE or employer’s National Insurance. There is also a small saving to the individual, as the main rate for National Insurance is slightly lower for partners than employees (9%, compared to 12%).

The example below shows the difference between someone being paid £100,000 as an employee or as a member of an LLP.


LLP Member





Employer’s NI



Cost to business






Individual tax



Net available to individual



So promoting members of the management team to the partnership can provide incentives for both business and individual.

Status of a member

This shows there is a clear tax incentive for the business to introduce as many members as possible. As a result, in 2014-15, HMRC introduced anti-avoidance salaried member rules to ensure only genuine partners are treated as members of the partnership. If a member is caught by these rules they are treated as an employee for tax purposes.

In most cases, new partners of an LLP will be joining as a fixed share or salaried partner. This means they are entitled to a fixed amount through a profit share, more like an employee receiving a salary. So it’s important that firms are aware of these rules. We considered these in our October Tax Talk article.

Moving to self-assessment

Once an employee is promoted to member of an LLP, they must register for Self Assessment by completing a Form SA401, notifying HMRC that they are now a partner. From the date of their promotion, the individual partner starts paying tax on their share of the partnership profit. As an employee, they would previously have been subject to Income Tax and National Insurance (Class 1 Primary and Class 1 Secondary payable by the employer).

The profits from the partnership taxable on the members are not the same as drawings. So they can be different from the amount paid as a drawing from the partnership.

Partners who are treated as self-employed are required to file a UK Self Assessment tax return — unlike most employed individuals. The Income Tax rates applied to partnership income are the same as those for employment income, using the progressive rates of 20%, 40% and 45%.

Crucially, while employees have taxes deducted at source from their monthly pay through the PAYE system, partners do not. Their allocations of partnership profit are typically paid out gross in the form of drawings and bonuses, with no taxes withheld. Instead, a partner is likely to fall within the system of payments on account, requiring them to pay tax twice a year:

  • 31 January (within the tax year)
  • 31 July (after the tax year ends)

Each payment on account is usually 50% of the previous tax year’s tax bill.

Capital contributions

One of the tests for the salaried member rules is the capital contribution. This could also be required by a partnership.

If a capital contribution is needed, it should be reported on the LLP’s balance sheet and will have no annual tax consequence.

The capital contribution might be used for the firm’s general cash flow and to fund the business’ working capital. If the members are asked to pay any contribution, they might use a personal loan from a bank (or this may be arranged by the firm). The loan interest to buy into a partnership will usually be a qualifying interest and deductible against taxable income of the individual members in the year. This relief is available on a ‘use it or lose it’ basis. If there is unused qualifying interest, this cannot be carried forward to the next year.

In a professional partnership, there is a substantial difference in the way partners and employees pay tax. For many promoted to partner, it will be their first experience of self-employment. So it’s important to be aware of the change in tax status and the requirements that such a promotion brings.

The information in this article is intended for general guidance only. It should not be regarded as comprehensive. For detailed information and advice on any issues raised, please contact Stephen Kenny or Tilak Lamsal.