LLP tax shake-up could hit doctors, lawyers, and accountants in Autumn Budget
Doctors, lawyers, accountants, and other professional services firms are facing the potential of a major shakeup of their tax and business structures. Rachel Reeves is expected in the upcoming Autumn budget to introduce Employer national insurance contributions (NICs), at around 15% to members of limited liability partnerships (LLPs). This, in theory, would bring them in line with other tax structures and a fairer system as well as generating roughly £2bn in additional revenue.
LLP structures are used by a high number of doctors, lawyers, and accountants and have long operated under that model. At present, the LLP is ‘tax transparent’ and pays no corporation tax instead the individual members report their profit and shares and pay income tax and self-employed national insurance. The LLP structure also allows the members to benefit from limited liability protection, whilst also benefiting from the flexibility of an LLP compared to a limited company.
What are the tax advantages of an LLP?
LLPs come with various tax advantages that have made them attractive to certain high-earning professions such as lawyers, doctors, and accountants. The benefits they include:
● Pass-through taxation: The LLP itself does not pay corporation tax on its trading profits. Instead, profits are allocated to members, who then pay income tax and self-employed National Insurance Contributions (NICs).
● Single layer of taxation: LLP members are taxed once on their share of the profits. Unlike a limited company, where the company pays corporation tax first and then individuals pay tax on dividends; LLP profits avoid “double taxation.”
● Minimum of two members: To form an LLP, there must be at least two members, unlike a sole trader or a single-shareholder limited company.
● Flexible profit allocation: Members can agree how profits are divided, providing more flexibility than company dividends.
● Self-employed status advantages: Members pay self-employed NICs rather than employer NICs, which can lower overall tax costs.
● Limited liability protection: Members’ personal assets are generally protected from the LLP’s debts or legal liabilities.
● Access to personal allowances and reliefs: Members are taxed individually, allowing them to benefit from personal allowances, tax bands, and other reliefs more efficiently than extracting profits from a company.
Simon Thomas, managing director of Oxfordshire Chartered Accounting firm, Ridgefield Consulting, commented: “The government’s proposal to impose employer NICs on LLP members is a significant shift in the tax landscape for professionals. Currently, partners in LLPs are treated as self-employed, allowing them to benefit from lower National Insurance contributions compared to salaried employees.
For instance, a partner in an LLP earning £2m annually currently takes home approximately £1,072,000 after taxes. Under the proposed changes, this same individual could see their take-home pay reduced to around £934,000, an increase of £138,000 in tax liability. This adjustment would raise their effective tax rate from 46% to 53%, with a marginal tax rate of 54% on additional income.
In contrast, a director of a limited company earning the same £2m could potentially structure their income to minimise tax liabilities, benefiting from lower corporation tax rates and dividend tax allowances. This disparity underscores the financial advantage of operating through a limited company over an LLP.
These proposed changes could drive professionals to reconsider their business structures, potentially leading to a surge in incorporations as individuals seek more tax-efficient models. Such a shift could have broader implications for the professional services sector, including increased administrative burdens and changes in service delivery models.
The government’s approach raises fundamental questions about the incentives for entrepreneurship and the support for professionals who contribute significantly to the economy. By altering the tax treatment of LLPs, the government risks undermining the very structures that have supported professional services for decades.”