The Chancellor’s proposed changes to partnership tax could have wide implications across professions

LLP partners are treated as self-employed which offers tax breaks compared to employees, notably a slightly lower National Insurance payment on some profits and no Employer’s National Insurance. It seems Rachel Reeves considers this to be unfair and will potentially be announcing changes to this system. 

Having crunched some high-level numbers, a partner earning £2 million currently takes home approximately £1.072 million. If employers NIC was applied, approximately £138,000 more tax would be paid with effective tax rate going from 46% to 53%. We have made some high-level assumptions on how this could be brought in, but the key point is that more tax would be paid. 

There are a few reflective points on this sort of tax increase: 

1. 1. Will this be limited to LLPs or include traditional partnerships? Not including traditional partnerships seems illogical, as businesses could simply move from being an LLP to a partnership (or the less used limited partnership where one partner is a corporate to take the risk). Although one might suspect the government would want to avoid this relatively easy planning to avoid the higher tax charge. 
   2. If it does include traditional partnerships, that will not just impact law firms, accounting firms and doctors (among others), but farmers tend to mostly act via partnership too (as a husband and wife for example), which means they would they be hit as well. Given the Inheritance Tax announcements for farmers and businesses at the last Budget that are due to come into play from April 2026, this would likely be unpopular among those being impacted by Inheritance Tax recently. There are also some rather large businesses in the UK that operate as traditional partnerships and it seems odd to exclude them but include LLPs. 
   3. We do already have rules in place that taxes partners as employees that were brought in some years ago. Broadly, a partner is taxed as an employee if they do not meet one of three conditions:
      • • Their partnership share is based on overall profits of the partnership;
        • They have a significant influence over the partnership affairs or;
        • They have at least 25% of their money at risk in the partnership as a capital contribution.

      Most LLPs or partnerships that do not meet the first two conditions tend to get around this via the 25% capital contribution with, in a lot of cases, banks lending to the partner to cover this. The point of these rules was to make sure partners that were, in reality, employees (perhaps with a fixed share profit and no capital ‘skin in the game’) were taxed as employees. If the changes come in these rules will mostly be redundant, but it does pose the question on whether a person in business that is taking a risk (with capital or uncertain profits, or losses) should be subject to Employers NIC. A sole trader, for example, would not be, but they are also in business so where do we draw the line?

   4. It could be said that the LLP could incorporate to avoid these rules and for simple partnerships that is likely the case, but that won’t be the case for bigger partnerships, who routinely promote partners and have partners leaving. Anyone that works in tax knows that bringing employees in as shareholders is much more difficult than bringing them into a partnership due to the tax rules on gifting employees shares. LLPs would need to think carefully about this. 
   5. Large firms such as law firms tend to operate all over the world. The work could in theory be done from anywhere which is the same for most professional work. Could we see some partners of these firms (or even firms themselves) move to lower tax jurisdictions (such as the Middle East) to escape tax? There are many jurisdictions that would have lower tax rates. It is something some might consider, although it would need careful planning. 

As a final point, these proposed changes could increase costs for many professional firms, which may in turn influence pricing models across the sector. 

Government may weigh GP exemption amid concerns from other professions

The proposed increase in the tax burden for LLPs is likely to hit GPs and NHS consultants hardest. Unlike solicitors and accountants, doctors’ partnership profit shares are generally more modest, and with ongoing pressures across the NHS, reports suggest that Rachel Reeves may consider introducing a specific exemption for medical professionals. However, introducing special provisions for doctors could complicate the policy and risk creating friction within the wider professional services sector, who already appear ready to shoulder much of the impact of these tax reforms.

Fortunately, the Gravita team are experts in this area, and are on hand to assist clients with whatever changes come to light.