Legal leaders fear huge losses as budget plan threatens to tax LLP partners like employers
A proposed new tax on limited liability partnerships (LLPs) could inflict a heavy financial blow on the legal profession, the Law Society has warned, after reports suggested that Chancellor Rachel Reeves is preparing to introduce employer-style National Insurance contributions for partners in next month’s Budget.
The Times revealed that the measure under consideration would apply the equivalent of employer National Insurance to LLPs, effectively treating partners more like salaried employees. The idea has sent shockwaves through the legal sector, which relies heavily on the partnership model for its flexibility and transparency.
Figures from the Centre for the Analysis of Taxation (CenTax) show that solicitors account for one-fifth of all partnership income — around £7.2 billion based on 2020 data — earning an average of over £300,000 each in annual profits. CenTax estimated that extending “partnership NICs” across all partnerships could raise £1.9 billion in the 2026–27 financial year, even after adjusting for behavioural and structural changes in response to the tax.
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Tax lawyer Dan Neidle, a former Clifford Chance partner and now head of Tax Policy Associates, calculated that a solicitor earning £316,000 would see take-home income fall from £180,000 to about £158,000 if the new levy were imposed. That change would push their effective tax rate up from 43 % to 50 %, and their marginal rate from 47 % to 54 %.
The difference would be even starker at the top end of the profession. A partner earning £2 million, Mr Neidle said, currently keeps £1.072 million after tax; under the proposed regime, that figure would drop to £934,000 — a loss of £138,000. Their overall tax rate would rise from 46 % to 53 %, with a marginal rate of 54 %.
“This puts a £2 million partner in the same position as a trader at a bank with equivalent income,” Mr Neidle said. “Previously, they paid less tax; now, they would pay the same.” He added that some lawyers might respond by leaving partnerships to become self-employed consultants, either genuinely or artificially, prompting potential avoidance concerns.
The Law Society’s director of public affairs, David McNeill, warned that the proposed change could undermine a sector already grappling with higher costs and regulatory demands. “Imposing a new tax on LLPs could be a big hit on the legal profession, a sector which the government is depending on as part of its growth strategy,” he said. “Law partnerships don’t get the same tax breaks for investment as other businesses but are now being asked to pay the same levels of tax. This makes no sense as a joined-up growth strategy.”
James Kipping, head of personal tax at accountants MHA, noted that the measure could apply to both LLPs and traditional partnerships, questioning whether there was any logic in differentiating between them. He warned that some might abandon LLP status — and its limited liability protections — for traditional partnerships if the tax burden became too high.
Mr Kipping also raised practical questions about how the new charge would work in practice. Unlike employer NICs, which are based on salaries, partner income is not paid through payroll but reported via self-assessment. “Will it be imposed directly upon the partner? And if so, how will relief be granted? Perhaps a new ‘partnership NIC’ at around 8 % — but that only adds yet more complexity.”
Sean Bannister, a chartered tax adviser at Edwin Coe, said partners often had their own capital at risk and played a vital role in employing others. “To target them again would deal a heavy blow to firms already managing rising costs,” he said. “Any additional tax burden will inevitably slow investment and growth, undermining the very agenda the government says it wants to promote.”
As the Budget approaches, the debate highlights a deeper tension between the government’s pursuit of additional tax revenue and its ambition to support professional-services growth. The outcome may reshape how law firms, accountancies and medical partnerships structure themselves — and how much of their profits they can keep.