Lawyers sound alarm over Rachel Reeves’ proposed tax target on LLPs
The Chancellor is reportedly looking to target limited liability partnerships (LLPs) for a tax raid as she tries to fill the fiscal black hole, but critics warn that this move will have consequences for the professional services sector.
The LLP model, used by professional services such as law firms, accountancy, and some doctors (GPs), came into force 25 years ago. An LLP is owned and run by its members (known as partners) who invest their own capital into the business.
The benefit of an LLP lies in its tax structure, where the entity itself does not pay corporate tax on its profits. Instead, it uses the principle of tax transparency, meaning its profits or losses “pass through” to the individual partners.
Also, unlike a traditional partnership model, those who opt for LLPs have more protection for their personal assets regarding debts, liabilities, and negligence of other members.
However, according to The Times, Rachel Reeves now considers this setup to be unfair and is expected to announce changes to the system in her Budget as she wants “those with the broadest shoulders” to pay their “fair share of tax”.
Additional tax on partners’ income
Partnerships, which include LLPs, comprised more than 6 per cent of the UK’s private sector businesses, according to academic-led think tank CenTax. Of the LLPs, there are nearly 200,000 people who work under this structure, largely made up of lawyers (around 20 per cent).
According to a report by CenTax, levying ‘partnership national insurance contribution (NIC) would raise an estimated £1.9bn in 2026-27. Now, Reeves is understood to be drawing up plans to extend NICs taxes to raise money for the Exchequer.
“The additional tax burden is on 15 per cent of income, presumably less the tax and NIC relief on that at up to 47 per cent, so just under 8 per cent additional tax on a partner’s income,” James Kipping, head of personal tax at MHA, explained.
“It is not clear how this will be administered,” he added. “Employer’s NIC is calculated and paid by employers by reference to salary payments paid via the payroll/PAYE. Partners receive a profit share – that is, a share of the net profit of the business, usually not known until the end of the accounting period, or some while afterwards.”
Lawyers hit back
The Law Society hit back, saying the potential move by the Treasury “makes no logical sense as a joined-up growth strategy.”
“LLPs are not just vehicles for high earners; they are the structure through which most professional firms invest, employ and share risk,” William Wastie, partner at Addleshaw Goddard, stated.
“The idea of extending employers’ NICs to all LLP members distorts the true nature of membership of LLPs, bodies which were designed by Parliament to be tax transparent and where members’ capital is invested and at risk,” he explained.
Sean Bannister, chartered tax adviser at Edwin Coe, pointed out that “Professional services remain one of the UK’s most productive and globally competitive sectors.”
He warned that by “undermining one of its main operating models”… it “shows a short-sighted understanding of what drives a services-led economy.”
“If the Chancellor goes ahead with imposing an NIC charge on LLPs, we will likely see a marked increase in the incorporation of partnerships to obtain cheaper recycling of capital,” Kevin Hindley, partner at Andersen, added.
The UK’s financial and professional service industry is the “bedrock of national economic strength”. According to data from 2023, the sector contributed £285bn in economic output, accounting for 12.6 per cent of the UK’s total gross value added.
Rachel Reeves insisted yesterday that “It’s my Budget and they are my choices and, frankly, some of the speculation is both ridiculous and in some cases damaging.”