What Could the Autumn Budget Mean for LLPs

With the Autumn Budget scheduled for 26 November, speculation is intensifying over potential reforms to the taxation of Limited Liability Partnerships (LLPs). Central to the debate is whether the government will introduce Employer National Insurance Contributions (NICs) on LLP members’ income. From a practical perspective, media estimates suggest this could raise approximately £2 billion annually, helping to reduce the government’s sizeable income shortfall. 

However, the change could disproportionately impact high-earning professionals such as lawyers, accountants, fund managers, and medical partners, and raise concerns across the broader professional services sectors. As this proposal could reshape the financial structure of many firms, understanding its implications is essential. It could also signal a potential shift in how the current government evaluates fairness in tax policy, with structural neutrality taking centre stage.

Current LLP tax treatment 

Currently, members of LLPs are taxed as self-employed individuals; as a result, their income is not subject to Employer NICs, which are typically 15% and apply to traditional employees. This creates a clear tax advantage compared to salaried roles, particularly at higher income levels.

Professional services firms, private equity partnerships, and even GP surgeries often operate as LLPs. For these firms, the current structure provides both legal flexibility and significant tax efficiency. It allows partners to receive distributions directly, avoid double taxation, and often retain more income than their employed counterparts. In practical terms, it has long been an attractive structure for professionals who wish to share profits while maintaining a collaborative business model.

What are the potential changes? 

Reports suggest Chancellor Rachel Reeves is seriously considering removing the Employer NIC exemption for LLP members. This would bring their tax treatment closer to that of employees, increasing the marginal tax rate for high earners from approximately 47% to 54%. Such a measure, if implemented, would effectively eliminate a key tax benefit of the LLP model.

A recent analysis by the think tank CenTax estimated that such a change could affect around 200,000 individuals, with the vast majority of tax raised coming from the top 10% of earners in this group. Some see the proposal as a targeted way to increase tax revenue without affecting lower-income households. Others argue that it’s a politically strategic move, targeting groups unlikely to attract much public sympathy while avoiding more controversial general tax increases.

If implemented, the measure would mark a significant shift in how professional income is taxed. It would also pose an administrative challenge for firms not accustomed to running payroll-style calculations for profit-sharing members.

Who might be affected? 

This reform would directly affect a broad range of high-earning professionals. Understanding the potential impact on these groups is vital for both individual planning and firm-level strategy:

• GPs: The average GP in a partnership earns around £118,000. If Employer NICs are applied, their take-home pay could fall by about £6,000. While this might not sound dramatic in isolation, it equates to a meaningful reduction in disposable income and could worsen ongoing recruitment and retention issues in general practice.
• Solicitors: For LLP members earning around £316,000, the effective tax rate could rise from 43% to 50%, reducing their net income by approximately £23,000. With partnership stakes often involving personal risk and capital contribution, this could alter the incentive structure for ambitious associates considering equity roles.
• Private equity partners: Some earning seven-figure incomes could see tax increases exceeding £100,000 annually. These professionals may respond not just by altering their residency or business structure, but potentially by shifting deal activity out of the UK altogether.

The takeaway is that this measure would primarily hit those already in the top income brackets, although mid-tier professionals could also feel the pinch. More broadly, there is concern about how this may affect the talent pipeline and the appeal of partnership models.

Arguments for reform

Supporters of the proposed change cite several strong reasons why it could be both fair and fiscally responsible:

• Revenue generation: We know the government needs to raise funds to meet fiscal targets, and this measure could yield a substantial amount. With public finances under pressure and limited scope for broad tax rises, targeting perceived loopholes offers a more palatable route to balancing the books.
• Fairness: Equalising the tax treatment between employed and self-employed individuals could reduce the incentive to arbitrage between structures. It’s a question of economic parity: why should two people doing similar work pay substantially different taxes based solely on their business format?
• Simplification: If applied consistently, it could allow the removal of complex anti-avoidance rules, such as those related to disguised employment. This could eventually reduce HMRC’s administrative burden and lower compliance costs across the board.

These issues suggest that the policy could create a more balanced and sustainable tax system. However, the government may be ignoring traditional behavioural responses by businesses to such challenges.

Arguments against reform 

Despite potential revenue gains, critics argue the policy could backfire economically and legally. Some of the key concerns include:

• Inconsistency: If the measure applies only to LLPs and not to traditional partnerships or sole traders, it risks creating an uneven playing field. This could lead to strategic reshuffling of firm structures purely to preserve tax status.
• Avoidance: Firms might restructure into general partnerships or foreign entities to sidestep the changes. The flexibility of professional services businesses means such moves are far from hypothetical.
• Economic impact: Additional costs could reduce UK competitiveness, especially in sectors like legal services and finance, where global mobility is high. In particular, London’s role as a worldwide legal and financial centre could be weakened.

In summary, opponents believe the proposal could harm UK business flexibility and investment. There is also the potential for knock-on effects on clients and consumers, as firms pass increased costs down the line.

Practical challenges for the government 

Even if the reform proceeds, its implementation would present technical hurdles. Some of the main issues include:

• Distinguishing between remuneration for labour and return on capital. This is not just a theoretical distinction; in many partnerships, income is a hybrid of effort and invested risk.
• Applying NICs only to UK-based partners within multinational LLPs. Determining residence and profit sources could become a significant administrative burden.
• Navigating potential conflicts with international tax treaties. Failure to align with global norms could lead to disputes or unintended double taxation.

These factors could complicate enforcement and reduce the policy’s effectiveness. They also raise concerns about fairness when inconsistencies arise between domestic and international partners within the same firm.

How has the industry responded? 

Major professional services firms, facing potentially significant financial challenges, are not standing still. Industry reactions have included:

• Lobbying by the Big Four and other trade associations. Meetings with HM Treasury and HMRC are already underway, with firms pressing for either exemption or more favourable thresholds.
• Exploring structural changes like incorporation. Some firms are reviewing whether to become limited companies with shareholder/director structures.
• Evaluating the potential shift of operations overseas. Moving some functions offshore could offer tax efficiency and protect partner income.

The industry’s rapid response underscores the scale of the potential disruption. It also reflects broader anxiety about whether the UK remains a supportive jurisdiction for professional services.

Possible compromises 

Several alternatives have been floated to make the policy more politically and economically palatable:

• Threshold exemption: Exempting the first £118,000 of income would shield average GP earnings while still capturing revenue from higher earners. This would preserve goodwill among health professionals while addressing the Chancellor’s fiscal goals.
• Phased implementation: A gradual rollout could reduce the economic shock and give firms time to adapt. A transitional period of two to three years might help firms reconfigure without sudden cash flow pressures.

While such adjustments could strike a balance between fairness and feasibility, they may also help avoid unintended consequences, such as disincentivising promotion to partnership.

Conclusion 

Although the rumoured proposals are not yet policy, the direction of travel suggests significant change could be on the horizon for LLPs. If Employer NICs are extended to partnership income, this would mark one of the most consequential tax reforms for professional services in decades.

Consequently, firms should proactively assess their structures, forecast potential tax impacts, and prepare for multiple scenarios. At Wilkins Southworth, we help clients model these changes and explore restructuring options to ensure compliance and efficiency in an evolving tax environment.

Whether you’re a GP practice, law firm, or financial services partnership, it’s important to be prepared for any potential changes. Contact us today to discuss how the Budget may affect your business or partnership.