In a significant fiscal move, UK Chancellor Rachel Reeves has introduced measures targeting high earners operating within limited liability partnerships (LLPs), such as lawyers, doctors, and accountants. This comes as part of her wider effort to address a substantial public finance shortfall, estimated between £30 billion and £50 billion. Central to these reforms is a charge designed to equalise the tax treatment on partnerships, which presently benefit from a tax advantage by being exempt from employer National Insurance contributions. The announced levy, expected to raise around £2 billion, will be imposed at a rate slightly below the 15 per cent employers’ National Insurance rate, aiming to close a loophole that has long allowed partners, who are treated as self-employed, to pay less tax compared to similar salaried employees.

The prevalence of LLPs in the legal sector is notable, with over 355,000 partnerships in the UK, including 86,000 with employees. The Centre for the Analysis of Taxation highlights that solicitors alone receive a fifth of all partnership income, averaging £316,000 annually in profits, with GPs and accountants also drawing significant earnings. Among these partners, some 13,000 individuals reportedly earn upwards of £1.25 million each year, underscoring the concentration of wealth within these professional groups. Reeves’s move to impose a "mansion tax" through capital gains tax on the sale of the highest-value properties further signals a broader strategy to target wealth in various forms.

These tax changes come amid growing economic pressures, with the Office for Budget Responsibility expected to downgrade growth forecasts. According to Reeves, factors such as Brexit and austerity have impeded economic performance more than initially anticipated, justifying a reconsideration of public spending and revenue generation methods. She has also noted the government’s efforts to improve relations with the European Union to reduce trade costs that have burdened businesses since 2016.

The new taxes form part of a wider package unveiled in Reeves’s first Budget, which includes £40 billion in tax hikes — the most significant increase since 1993. This includes a £25 billion rise in employers' National Insurance contributions, with the rate set to increase from 13.8% to 15% while lowering the threshold at which employers must begin paying National Insurance from £9,100 to £5,000. Moreover, capital gains tax rates have been increased, with the basic rate rising from 10% to 18% and the higher rate from 20% to 24%. Other measures include a freeze on fuel duty for another year, aiming to ease cost pressures on consumers.

The tax increases have sparked debate among economists and business leaders. Arun Advani, director of the Centre for the Analysis of Taxation, argues that the current exemption of LLP partners from employer National Insurance is regressive since partnership income is heavily concentrated among the very wealthy. He contends that equalising tax treatment will correct this imbalance, as “there is no reason why partners should pay less tax than similarly highly paid employees and business owners.” Conversely, Stuart Adam, senior economist at the Institute for Fiscal Studies, recognised that while LLP partners often earn substantial incomes and may function similarly to employees, introducing higher taxes could deter work or investment, potentially prompting some individuals to leave the UK or discourage new entrants.

The broader business community has voiced concerns as well. Rain Newton-Smith, head of the Confederation of British Industry, urged Reeves to reconsider her commitments against raising income tax, National Insurance, or VAT on workers. She argued any further tax increases on businesses could stifle economic growth, urging a more balanced tax policy to foster investment and recovery amid economic challenges.

While Reeves has pledged not to raise taxes directly on income, National Insurance or VAT for employees, she has not ruled out increasing National Insurance contributions for businesses to address the ongoing fiscal deficit. In making these decisions, the Treasury seeks to balance generating necessary public revenue with maintaining a stable economic environment conducive to investment and growth.

Collectively, these developments mark a clear pivot towards more progressive taxation on wealth and corporate structures, reflecting the government's response to evolving economic realities post-Brexit and the pressures of public finance sustainability. The changes will require LLP partners to reassess their tax positions and could have wide-ranging implications for professional sectors where partnerships are the dominant business form.

📌 Reference Map:

  • Paragraph 1 – [1] The Independent, [2] GB News
  • Paragraph 2 – [1] The Independent, [2] GB News
  • Paragraph 3 – [1] The Independent, [5] Reuters
  • Paragraph 4 – [3] Trustnet, [4] The National News, [7] Euronews
  • Paragraph 5 – [1] The Independent, [2] GB News
  • Paragraph 6 – [1] The Independent, [2] GB News
  • Paragraph 7 – [6] Reuters, [5] Reuters

Source: Noah Wire Services