LLPs Under Pressure

Leaking of Taxation: LLPs Under Pressure and the Myth of Self-Employed NI Avoidance

The government’s tightening grip on taxation for Limited Liability Partnerships (LLPs) is poised to hit General Practitioners (GPs) and other professionals who operate under these structures—many of whom already contribute significantly to the public purse. The narrative that self-employed individuals somehow dodge National Insurance (NI) is not only misleading, it’s fundamentally incorrect. 

The Reality of NI for the Self-Employed

Self-employed individuals, including those in LLPs, pay Class 4 National Insurance Contributions (NICs) on profits. This is effectively an additional tax:

1. 6% on profits between £12,570 and £50,270
2. 2% on profits above £50,270

This is levied on top of income tax, making the overall tax burden substantial. The idea that the self-employed “don’t pay NI” ignores this entirely. 

The Corporate Advantage

In contrast, those who operate through limited companies enjoy a more flexible and tax-efficient structure:

1. Profits are taxed at 20% corporate tax
2. Directors often take a minimal salary, reducing NI liability wiping out
3. The remainder is taken as dividends, which are not subject to NI at any stage

Dividend tax rates are:

1. 8.75% (basic rate)
2. 33.75% (higher rate)
3. 39.35% (additional rate)
   (after the £500 dividend allowance)

This structure allows for strategic income planning and smoother cash flow management, which LLPs and traditional partnerships cannot easily replicate. 

LLPs and Partnerships: Taxed on What You Earn, When You Earn It

Partners in LLPs and traditional partnerships are taxed on their share of profits in the year they are earned. There’s no option to defer income or smooth it over multiple years by taking only dividends within the basic rate. In good years, this can mean paying:

1. 20% (basic rate)
2. 40% (higher rate)
3. 45% (additional rate)
   on personal income tax, plus NI.

This rigidity can be punishing, especially in volatile sectors like healthcare, and law where income can fluctuate but tax liabilities rates remain applicable.

An extreme analogy is that of a rockstar who releases a hit album and earns a large income, resulting in a hefty tax bill. The following year, however, their new release doesn’t perform as well, and income drops significantly. Despite this, they still owe taxes based on the prior year’s success. This highlights the difficulties to smooth out their income and tax liabilities over time, often having to rely on the earnings from a single prosperous year to sustain themselves.​​​​​​​ 

The Hidden Tax Trap: Marginal Rates Up to 61%

One of the most punishing quirks of the UK tax system hits those earning between £100,000 and £125,140. In this band, the personal allowance is gradually withdrawn, creating a stealthy marginal tax rate of up to 61% when you combine:

• 45% income tax
• 2% Class 4 NICs
• Loss of the £12,570 personal allowance

This trap disproportionately affects employees and self-employed individuals with earned income, especially those unable to “smooth” their income across years. Unlike company directors who can defer or restructure income through dividends, LLP members and sole traders are taxed on what they earn, when they earn it—making them especially vulnerable to this punitive band.​​​​​​​ 

Conclusion: A System in Need of Reform?

The current tax landscape creates a disparity between business structures. LLPs, once seen as a flexible and professional-friendly model, are now under scrutiny and facing increasing tax pressure.

Meanwhile, limited companies which include huge multinationals would continue to enjoy more control and efficiency in managing tax liabilities.

If the government is serious about fairness in taxation, it cannot ignore these potential huge structural imbalances—starting with the myth that the self-employed are not paying their fair share.