Rumour Suggests The Chancellor Is Looking At Limited Liability Companies

22nd October 2025

The fairness question: Limited partnerships vs. employees.

What limited partnerships allow

A Limited Partnership (LP) or Limited Liability Partnership (LLP) is a business structure where:

Each partner is self-employed, not an employee.

Partners share profits directly (not through PAYE).

Partners usually don't pay employer National Insurance Contributions (NICs) — unlike employees, where the employer pays 13.8% NICs on top of salaries.

Profits can sometimes be allocated flexibly (e.g. to reduce exposure to higher-rate tax bands).

LLPs may offer limited liability, protecting members' personal assets.

This can lead to significant tax advantages compared to being a salaried employee, especially for high earners (e.g. partners in law, accountancy, private equity, or medical firms).

Why employees can't access these advantages

Ordinary employees:

Are taxed under PAYE, with income tax and NICs deducted at source.

Trigger an employer NIC charge for their employer (13.8% of salary).

Cannot normally choose to take income as profit distributions or defer income.

Cannot form LLPs simply to disguise employment — HMRC's "disguised employment" and IR35 rules are designed to stop that.

So the "unfairness" perception arises because two people doing similar work — say, a senior lawyer on payroll and a partner in an LLP — can face very different effective tax rates.

The policy argument for reform

The government (and HMRC) have long worried that LLPs and certain partnership structures are being used to:

Avoid employer NICs, costing the Exchequer billions;

Blur the line between employment and self-employment; and

Create artificial income allocations to lower tax rates.

Hence, the latest reform discussions (e.g. October 2025 budget previews) are framed as an "equalisation" measure — not necessarily anti-business, but about tax neutrality and perceived fairness.

Economists and think tanks such as the Institute for Fiscal Studies (IFS) and Resolution Foundation have argued that the tax gap between employment and self-employment:

Distorts incentives, encouraging people to change legal form rather than do more productive work;

Erodes the tax base, especially National Insurance; and

Creates inequity between similar earners.

The counterarguments

Business groups argue that:

LLPs and partnerships are not equivalent to employment — partners take on real entrepreneurial risk, capital exposure, and variable income.

They do not receive employment rights or benefits (holiday pay, redundancy, pensions).

Imposing employee-style taxes could undermine professional and investment partnerships, or make the UK less attractive for global funds and professional firms.

So from that perspective, they argue the difference in tax is justified compensation for higher risk and fewer protections.

From a tax equity standpoint, limited partnerships can appear unfair, because they give opportunities to reduce tax that most employees cannot access.
But from a business structure standpoint, many argue the difference reflects genuine differences in risk and rights — so it's not as simple as "unfair avoidance."

Each £150k LLP partner yields £18k less in total tax than an employee on the same income — mostly because of missing employer NICs.

The 2025 proposals (to apply an employer-equivalent charge to LLPs) would close much of this £18k gap per high-earning partner.

Even at £60 k, the tax gap per person is around £6,700 — still sizeable relative to income.

The pattern holds: the Treasury loses mainly because LLP structures avoid employer NICs.

Scottish Limited Partnerships (SLPs) and Scottish Limited Liability Partnerships (Scottish LLPs) are special cases with some key legal and tax distinctions worth unpacking carefully.

What a Scottish Limited Partnership (SLP) is

An SLP is a type of Limited Partnership governed by the Limited Partnerships Act 1907, but registered in Scotland.

The key feature: unlike English LPs, a Scottish LP has its own separate legal personality — it can own property, enter contracts, and sue/be sued in its own name.

This makes it more flexible for investment structures (especially in private equity, real estate, and funds).

Tax treatment of Scottish Limited Partnerships

For UK tax purposes, SLPs are transparent entities.
That means:

The partnership itself doesn't pay tax.

Profits are allocated to partners, who then pay Income Tax (if individuals) or Corporation Tax (if companies) on their share.

So, the core tax rules are the same as for English Limited Partnerships.

There's no separate Scottish tax treatment — though partners who are Scottish taxpayers pay the Scottish rates of income tax on their share of profits.

SLPs have been under scrutiny

For several years, SLPs were used in offshore and opaque ownership structures, because they could have non-UK partners and a legal personality but limited transparency.

Following media investigations (e.g., Panama Papers, 2017), the UK Government reformed them:

Since 2017, all SLPs must register their Persons of Significant Control (PSC).

Further anti-money-laundering and reporting rules were added via the Economic Crime and Corporate Transparency Act 2023.

SLPs that fail to maintain transparency can now be deregistered by Companies House.

Scottish LLPs (distinct from SLPs)

A Scottish Limited Liability Partnership (Scottish LLP) is governed by the Limited Liability Partnerships Act 2000, just like English LLPs — the only difference is that it's registered in Scotland.

Legal status: separate legal entity (same as English LLP).

Tax status: treated as a partnership (transparent) if it is genuinely carrying on a trade and not incorporated like a company.

NICs and income tax: identical to LLPs elsewhere in the UK — partners pay Income Tax and Class 2/4 NICs; no employer NIC.

Current and proposed reforms (2025 context)

The Treasury's October 2025 pre-Budget discussions (see FT, Times, Guardian reports) about taxing LLPs more like employees would apply UK-wide, including Scottish LLPs.

So if an employer-equivalent NIC charge on partners were introduced, Scottish LLPs would not be exempt.

SLPs themselves are unlikely to be the main focus, since most reform discussions target LLPs used by professionals (lawyers, accountants, doctors, consultants) — SLPs are more often used in investment funds and holding structures.

Main users of LLPs in the UK
Professional services firms

This is by far the biggest group.
Typical users:

Law firms (e.g. Allen & Overy, Clifford Chance, DLA Piper, many regional practices)

Accountancy firms (e.g. Deloitte LLP, PwC LLP, KPMG LLP, EY LLP)

Consultancy and advisory firms (management, financial, recruitment consultancies)

Architects, engineers, surveyors, and similar professional partnerships

Why?

Professional firms value profit-sharing flexibility, limited liability, and the prestige of partnership (versus being a company with directors/shareholders).

LLPs simplify bringing in and retiring partners without share buy-backs.

Income flows directly to members, avoiding double taxation of profits/dividends.

Investment & fund structures

Used widely in:

Private equity and venture capital (to structure management teams' profit shares and carried interest)

Hedge funds and real estate funds (especially in conjunction with Limited Partnerships or Scottish LPs)

👉 Why?

Transparency for investors — profits flow through to partners, avoiding corporate tax leakage.

Flexibility to align profit shares with performance.

International investors often prefer transparent UK vehicles for tax treaty access.

C. Medical and professional partnerships

Many GP practices, dental practices, and veterinary practices** have adopted LLP structures.

Often driven by risk management (e.g., avoiding personal liability for clinical or property risks) and administrative simplicity.

D. Property & construction businesses

Property investment or development groups sometimes use LLPs to hold projects jointly.

Common where multiple investors or developers want flexibility in allocating profits or losses.

E. Smaller knowledge-based consultancies

Boutique consultancies, tech advisory firms, and design studios sometimes choose LLPs instead of limited companies for:

Prestige (being called "partners"),

Simpler profit extraction,

Lower National Insurance costs.

Numbers and scale

As of 2025, there are roughly 70,000 active LLPs in the UK (Companies House data).

The vast majority (≈70-80%) are in professional and business services sectors.

Around 10-15% are in real estate, finance, and investment.

A smaller number operate in medical, scientific, or creative industries.

(Source: Companies House 2024 dataset; BEIS "Business Population Estimates")

Why the government cares

Because LLPs are used so heavily by high-earning professionals and financial partnerships, reforming LLP taxation:

Raises significant revenue potential (tens of thousands of partners earning £100k-£500k+);

Targets a group perceived as benefiting from preferential tax treatment;

Avoids hitting small companies or employees directly.

That's why they're in the crosshairs for the 2025 Budget.

LLPs are mainly used by high-skill, high-income professionals and investment partnerships — not by typical employees or small traders. That's exactly why HM Treasury and think tanks (like the IFS) see them as a focus for reform: they're widespread, lucrative, and sit at the boundary between employment and entrepreneurship.

Tax fairness
Why they seem unfair

Employees pay Income Tax and National Insurance (NI) through PAYE.

Their employer also pays 13.8% employer NI on top.

LLP partners pay Income Tax and self-employed NI (Class 2 + Class 4) — but no employer NI at all.

As we saw in earlier examples:

A £150k earner in an LLP can trigger ~£18,000 less total tax than an employee on the same income.

So from a tax-equity standpoint, LLPs create a structural advantage for high earners that ordinary workers cannot access.

Supporting evidence

The Institute for Fiscal Studies (IFS) has repeatedly said that the tax gap between employment and self-employment distorts behaviour and erodes fairness.

HMRC’s own data show growing use of partnerships in sectors with high incomes and low capital risk — suggesting many choose the structure mainly for tax/NIC efficiency, not genuine entrepreneurial risk.

Economic fairness / contribution to society
The argument against LLPs

Many partners in LLPs (lawyers, consultants, accountants, doctors) are among the UK’s highest earners.

Because LLPs can reduce National Insurance liabilities, they contribute proportionally less to funding the NHS, welfare, and pensions systems than employees on similar incomes.

For ordinary taxpayers, especially PAYE employees who can’t restructure their income, that looks unfair — a system "tilted toward professionals."

The counter-argument

LLP members don’t get employment rights: no paid holiday, sick pay, redundancy, or maternity cover.

They take on financial and reputational risks — if the firm fails, they could lose capital or income.

Many LLPs reinvest profits, employ large staff, and generate tax indirectly through PAYE and VAT.

So, while LLP members may pay less personally, their firms still support the economy and public finances.

Transparency and integrity

LLPs are required to file accounts and register partners at Companies House, but there are transparency loopholes, especially where offshore partners or opaque ownership structures exist.

In the past, Scottish Limited Partnerships (SLPs) were exploited for money laundering — damaging public trust in partnerships more broadly.

Reforms since 2017 have improved transparency, but critics argue the public still doesn’t see the full financial picture of large LLPs compared to public companies.

LLPs can be seen as unfair to the general population in tax and contribution terms, even though they serve legitimate business purposes. That’s why reform is now politically popular and fiscally attractive.

the potential revenue implications of extending employer National Insurance Contributions (NICs) to Limited Liability Partnerships (LLPs), a proposal currently under consideration by Chancellor Rachel Reeves in the upcoming UK Budget.

Estimated Revenue from Extending Employer NICs to LLPs

The UK Treasury estimates that applying employer NICs — currently set at 15.05% — to partners in LLPs could generate approximately £1.9 billion annually. This change would affect around 200,000 individuals who currently benefit from the self-employed NIC regime, thereby reducing their overall tax liability compared to employees.
Personnel Today

Potential Impact on High-Income Partners

For high-earning partners, such as those in law or accounting firms, the financial impact could be significant. For instance, a partner earning £2 million annually could see their take-home pay decrease by approximately £138,000 due to the additional employer NICs. This represents a substantial increase in their tax liability, aligning their contributions more closely with those of employees earning similar amounts.
nonbillable.co.uk

The Tax Gap

The UK's tax gap — the difference between taxes owed and taxes paid — was estimated at £46.8 billion for the 2023/24 fiscal year. A significant portion of this gap is attributed to non-compliance within small businesses, including LLPs. By extending employer NICs to LLPs, the government aims to reduce this gap and ensure a more equitable tax system.

Equity Considerations

Critics argue that the current tax treatment of LLPs is inequitable, as it allows high-income individuals to pay less in taxes compared to their counterparts in salaried positions. The proposed reform seeks to address this disparity by aligning the tax obligations of LLP partners with those of employees, thereby promoting fairness in the tax system.
centax.org.uk


Extending employer NICs to LLPs represents a significant policy shift aimed at enhancing tax fairness and reducing the tax gap. While the estimated £1.9 billion in additional revenue is noteworthy, the broader implications for equity and compliance within the UK's tax system are equally important considerations.