Reeves: Budget next month
A new tax on limited liability partnerships (LLPs) could be “a big hit” on the legal profession, the Law Society warned yesterday.
The Times revealed that Chancellor Rachel Reeves was considering introducing the equivalent of employer National Insurance contributions (NICs) for LLPs in next month’s Budget.
Figures from a report published last month by CenTax (the Centre for the Analysis of Taxation) said solicitors received one fifth (20%) of all partnership income, £7.2bn, on 2020 figures, averaging over £300,000 each in partnership profits annually.
Levying ‘partnership NICs’ on all partnerships would raise an estimated £1.9bn in 2026-27, after accounting for behavioural responses and interactions with other taxes, it said.
According to high-profile tax lawyer Dan Neidle, a one-time partner at Clifford Chance who now runs Tax Policy Associates, a solicitor whose gross income is £316,000 currently takes home about £180,000 after tax. If it was subject to employer NICs, this would fall to £158,000.
“This is a very big difference. His effective tax rate (i.e. overall tax divided by overall income) has gone up from 43% to 50%. His marginal tax (i.e. the % tax they pay on the next pound he earns) has gone up from 47% to 54%.”
The effects would be “more dramatic” at the largest law firms, where partners are pulling in seven-figure sums.
“A partner earning £2m currently takes home £1,072,000, but this would fall to £934,000 under the reform, ie £138,000 more tax. “Her effective tax rate has gone up from 46% to 53% and her marginal tax rate is now 54%.
“This puts our £2m partner in the same position as (say) a trader at a bank where their salary and bonus pot are together £2m. Previously she paid less tax; now she pays the same.”
Mr Neidle contrasted this with the position of self-employed barristers: “It’s hard to see why a barrister who earns £2m should pay less tax than a solicitor who earns the same.
“This becomes quite hard to fix unless employer national insurance (or something equivalent) is applied to all the self-employed.”
He predicted that some would leave partnerships to become self-employed consultants. “Sometimes this would be real. Sometimes this would be artificial avoidance – one could imagine a GP practice or law firm splintering into multiple ‘consultants’ all claiming to be self-employed. New anti-avoidance may be required on top of existing rules.”
Mr Neidle said some firms would restructure into companies. “On the fact of it this saves just a small amount of tax – my calculations suggest an average GP could save £3,000, and even a £2m law firm partner would save only £13,000.
“However in practice it may save more than this, as the companies could retain and reinvest profit. That may even have business and economic advantages.”
He cautioned that employees could be hit indirectly by receiving lower pay rises, as could clients through higher fees.
David McNeill, director of public affairs at the Law Society, said: “Imposing a new tax on LLPs could be a big hit on the legal profession, a sector which the government is depending on as part of its growth strategy.
“Law partnerships don’t get the same tax breaks for investment as other businesses but are now having to pay the same levels of tax. On top of that, law firms are facing the risk of new regulation costs and bureaucracy. This makes no logical sense as a joined-up growth strategy.”
James Kipping, head of personal tax at accountants MHA, said: “It appears as though this tax would be imposed on both LLPs and traditional partnerships. There can be no rationale for differentiating between [them].
“Otherwise, one behavioural response might be that people sacrifice the limited liability afforded by LLPs in favour of a traditional partnership with lower tax exposure, which cannot be progressive.”
He questioned how the new tax would be administered, given that it could not be linked to salary as with employer NICs.
“Therefore, will it be imposed directly upon the partner, via self-assessment? If so, how will that work? An actual employer would get tax relief for the employer’s NIC payments, so how will this relief be given to partners/LLPs? Perhaps a new ‘partnership NICs’ at around 8% – so yet more complexity.”
Mr Kipping agreed that an “obvious behavioural response” will be to incorporate, which he observed would allow profit to be retained and potentially reduce the amount of tax collected.
He noted that LLPs were introduced in 2001 for “very good reasons”; these included the need for limited liability alongside preserving partnership-style internal flexibility.
“Therefore, will this measure actually encourage the short-term tax-motivated decision for partnerships/LLPs to incorporate en masse, which might be to the determinant of the long term needs of the business and therefore the professional services sector in the UK?”
Sean Bannister, chartered tax adviser at London law firm Edwin Coe, pointed out that partners often had their capital at risk.
“They are entrepreneurial, take genuine financial responsibility, and employ others. To target them again would deal a heavy blow to firms already managing rising costs. Any additional tax burden will inevitably slow investment and growth, undermining the very agenda the government says it wants to promote.”
Andrew England, business tax partner at accountants Menzies, added: “LLPs already face a structural tax disadvantage compared to limited companies, as they cannot access reliefs such as full expensing for capital investment, R&D relief, or tax-efficient benefits like EV schemes and salary sacrifice.
“Coupled with the recent change of basis period, which has accelerated tax liabilities for many professional partnerships, the proposed NIC regime risks compounding cashflow pressures.
“To proceed without consultation on these wider consequences would risk damaging not only the affected firms but also the wider economy.”
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