Government Budget: what a new tax charge might mean for LLPs

The government is reportedly considering a change to the way members of UK limited liability partnerships are taxed. Chancellor Rachel Reeves is said to be weighing up a new tax charge on individuals operating through LLPs. This article looks at the current situation and what a change like this might mean for UK LLP partnerships. 

The current system

An LLP is transparent for tax purposes, meaning its profits or losses 'pass through' to the individual members. LLP members are taxed on their respective share of the partnership profits. Under the current system, members of LLPs are treated as self-employed, meaning that their LLPs do not pay employer national insurance.  

Each member must therefore register with HMRC for self-assessment, file an annual tax return, and pay income tax and national insurance contributions on their total income, which for these purposes includes their share of any partnership profits. 

How might the changes work?

Reports suggest that the new charge could be modelled on the existing 15% employer national insurance contribution (NIC) rate but recognising that charging an equivalent of employer NICs on partnership income requires some administrative considerations due to the tax transparency of partnerships.

As this new charge cannot be administered directly at the partnership level, it would likely instead be applied at the member level. This means that the proposed new charge could almost serve as a top-up rate on members income tax payments. 

Whilst details are scarce regarding how this charge - if introduced - would be applied in practice, a recent report by CenTax (the Centre for the Analysis of Taxation) states that it is thought that the calculation to arrive at a members charge would comprise the figure of 13.04% multiplied by the share of income currently retained by a member after income tax and class 4 NICs.

The same report states that such a calculation leads to an effective ‘top-up’ rate of 6.9% on partnership profits taxed at the additional rate, 7.6% for those taxed at the higher rate, and 9.6% for those taxed at the basic rate. This would represent a significant shift in the way LLP members are taxed. 

The proposed measure would therefore bring the tax treatment of members of LLPs closer in line with that of employees.

What next?

All eyes will be on the budget to see if these changes are made and in what format. If introduced, there may be compliance, finance and tax issues to review and potentially consideration of alternative business models to ensure arrangements remain efficient, appropriate and compliant. We can advise and support on any issues arising – please get in touch to discuss.