The media coverage in recent weeks has been building and it is looking increasingly inevitable that the Chancellor will announce in the upcoming Budget (scheduled for 26th November) a new NIC charge on individual members of LLPs equivalent to that imposed on employers in relation to compensation. It is not a new proposal, but it has gained further momentum after being put forward again by a number of political think tanks and featured in the press.
Having raised employer’s NICs to 15% (previously 13.8%) in April 2025 the move is unlikely to gain support from the business community although given the profile of the typical member of an LLP the wider voting public may be pleased with the move.
The asset management industry has widely adopted LLP structures as a vehicle of choice in the UK, along with many lawyers, accountants and other professionals. It’s a business model that provides a far greater level of flexibility to attract and retain senior personnel (particularly at the start-up phase), but also provides the most tax efficient structure for profit distribution. However, there are clear downsides too – individual members do not have the protection of employment rights, any capital they have contributed to the business is at risk and there is no option to reinvest back into the business at a lower tax rate like corporates are able to do due to the mixed membership rules. Nonetheless the policy drive for equality between members of LLPs and employees now seems to be focused purely on the tax rate.
What additional NIC rates are we expecting to see imposed?
We don’t know the answer yet, but it feels likely that it will seek to align the effective rate of tax between LLP members and employees, which equates to approximately 7% (or 6.91% to be precise) pushing additional rate taxpayers to an effective tax rate of 53.91% – see below.
The 50% tipping point where more of the money earned goes to the Government than the individual is often cited as a critical one, albeit in reality this is already the case for employees at the additional rate. The UK did have a top 50% income tax rate between 2010 and 2013, but since then it has been held at 45%, with self-employed individuals also suffering an additional 2% NICs, meaning the current effective tax rate for a member of an LLP making over £150,000 per annum is currently 47%.
But don’t we have rules that tax individual members as employees already?
Yes, in 2014 the UK introduced the salaried member rules which sought to differentiate between ‘true’ partners in an LLP and employees. For more detail please see here: https://larkstoke-advisors.com/2019/12/09/salaried-members-when-is-a-partner-an-employee/. The result of the legislation is that unless an individual partner has significant influence, a profit share in some way linked to overall profits of the LLP or a certain level of capital at risk then they would be recharacterized as an employee and taxed on that basis imposing employer’s NIC. However, the legislation has been the subject of dispute ever since its introduction and the first tested case has now progressed as far as the Supreme Court after BlueCrest (the defendant in the case) was given leave to appeal following the Court of Appel’s decision earlier this year: https://larkstoke-advisors.com/2025/01/19/court-of-appeal-decision-in-hmrc-v-bluecrest-capital-management-uk-llp/. The Supreme Court are due to hear the appeal early in 2026, but it now looks like the position going forward will be quite different.
How and when will it be implemented?
Typically tax changes announced in the Budget come into force from the start of the next tax year, i.e. from 6th April 2026, however there is recent precedent for NIC changes to be immediate, i.e. from 26th November 2025. For asset managers crystallising performance fees on 31st December 2025 the earlier implementation date could make a material difference. The working assumption is that any additional NIC charge will be charged under the self assessment system and profits would be time apportioned, but if it aligns with employer’s NIC then allocating profits and drawing on them before Budget day might be sensible. Thought should also be given to amounts wrapped up in AIFMD deferral mechanisms, if these amounts vest after a change is implemented then deferred amounts could possibly be taxed at a higher rate. At present the 45% tax credit allocated on vesting only covers the income tax and there is still 2% NIC to be funded. Some managers may look at whether early vesting is an option.
Will this move force individuals to leave the UK?
Clearly a 7% tax rate increase will have a direct impact on the UK’s ability to compete against other financial centres around the globe. Professionals that are intrinsically linked to the UK (e.g. they specialise in UK law) are unlikely to look to relocate, but the same does not necessarily apply for the asset management sector, particularly where they already have an office in another jurisdiction (something that is increasingly common). The removal of the non-domicile regime, inheritance tax on private pensions and VAT on private school fees have all impacted the industry. In a post-covid world where other jurisdictions are actively courting asset management professionals it is likely there will be some level of attrition. Arguably the more interesting question in the long term is whether the Chancellor takes the nuclear option and introduces an exit tax for those leaving the UK. With reports that the UK is haemorrhaging high net worth individuals at an alarming rate such a step has never looked more likely.
Is incorporation the answer?
For some yes, there has been a trend in recent years for mature LLPs to convert into Ltd company structures, enabling them to roll up value within a corporate structure (albeit balancing this with possible charges under the disguised investment management fee rules). For businesses with an established senior management team, no desire to give away equity in the business and a healthy profit surplus making the switch makes sense. In certain situations this can be achieved on a tax free basis using incorporation or gift relief, but where corporate members exist this can create challenges, particularly where intangibles / goodwill is involved. The time taken to acquire a new regulatory licence from the FCA is often the biggest hurdle, with time scales running up to 9 months to make the switch. It’s a project that requires thought from a legal, accounting, tax, HR and regulatory perspective and is best handled by a team that have experience managing the process from start to finish.
In a wholly corporate structure asset managers have the option to retain value in the business at corporation tax rates, which at 25% is significantly lower than the effective 47% in the LLP structure, however they will need to get to grips with the quarterly instalment payment regime for corporates. Nevertheless, this could in theory lead to an immediate drop in tax revenues and give shareholders some different exit strategies at lower tax rates. Hopefully the Chancellor does not seek to tinker with the rules around incorporation, preventing businesses from moving out of LLP structures would be cynical to say the least.
An alternative approach might be to retain the LLP but only have corporate members, with individual members becoming employees, either of the LLP or one of the corporate members. Whilst this seems a neat solution the anti-avoidance provisions of the mixed membership rules could present a risk.
Is there anything that could be done to soften the impact?
If the policy objective is equality then imposing the new NIC charge on all self-employed individuals would seem fair and would undoubtedly raise significantly more tax. The mismatch between the taxation of employees and the self-employed has been the elephant in the room for some time – with successive Governments avoiding tackling the issue. The rationale as to why a sole trader should be taxed at a lower rate to two individual members that decide to operate through an LLP is not clear. It creates an incentive for individuals to remain sole traders (and all the risks that go with that) rather than combine forces and build a business (a similar barrier exists around VAT thresholds) – so clearly at odds with the UK’s growth agenda.
It is also not clear as to why the focus is on LLPs only, not general partnerships. However, taxing sole traders is probably considered to be at odds with Labour’s pre-election promises. By way of reminder page 21 of the Labour Party’s 2024 election manifesto states: “Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.” The implication being that individual members of LLPs do not meet the definition of working people (readers can judge this for themselves).
A sensible step (perhaps a little too optimistic) would be to remove the tapering of the personal tax allowance between £100,000 and £125,000, that creates the marginal effective rate of 62% at present. With an equivalent NIC increase to employer’s NIC the maths works this out to be a marginal tax rate of 67%, meaning an individual partner in this band will lose two-thirds of their income to tax. Yet given that this measures raises over £5Bn per annum it is unlikely to be wound back.
A practical step that would be welcomed by business would be to drop the mixed membership rules that prevent the roll up of value and reinvestment in a corporate partner at corporation tax rates. This would create a level playing field between LLPs and limited companies, removing the need to incorporate businesses (a sensible step to save time and money). If LLPs had the means to build up reserves in this way then they would be far more resilient and more inclined to invest in future growth. That one change would give them something back in return and would perhaps be sufficient to give members of LLPs some hope that the Government is supporting business.
What action should LLPs be taking?
LLPs should start having conversations with their members about how they could be impacted, implications for the future and the options available. There are a few sensible things that could be done now, the key points to consider for asset managers structured as LLPs are as follows:
- Consider implementation timings for the proposed changes and how this aligns with forecast profits;
- Quantify and communicate the potential impact to individual members;
- Consider AIFMD deferrals and vesting implications;
- Review current year profits and feasibility of interim profit allocations and drawings;
- Appraise LLP agreements and contractual commitments to members;
- Consider restructuring options and how long this could take to achieve;
Talking to your advisors would be a good first step – so please get in touch should you wish to discuss.