What are the proposed changes to partnership tax? What impact will the changes to NIC on partnership profits have?
Recent press reports suggest the Chancellor is considering introducing changes to NIC on partnership profits, including those earned by partners in LLPs and traditional partnerships. The reported proposal means changes to NIC on partnership profits, is thought to follow on from the CenTax report: Equalising National Insurance on Partnership Income issued in September, could significantly change the tax landscape for professional services firms.
What impact will the changes to NIC on parternship profits have?
At present, the members of partnerships and LLPs are not subject to employer NIC, since partners are treated as self‑employed rather than employees. This treatment reflects the commercial reality: partners share risk, invest personal capital, and lack the employment protections provided to employees. Anti‑avoidance rules, such as the salaried members’ legislation, already ensure only genuine equity partners qualify for this status.
Initial expectations are that the proposed rate would add roughly 8% to a partner’s effective tax burden after tax reliefs — a substantial change that would affect all income allocated to partners, regardless of whether that income is actually drawn. Given that many partners retain a portion of their profit share within the firm to support working capital or capital account requirements, the true rate of tax on take‑home pay would in practice be significantly higher than headline figures suggest.
From an administrative and planning perspective, several issues remain unclear. Employer NIC is tied to payroll and salaries, yet partnership profit shares are typically determined only at or after year‑end. How such a measure would be accounted for — and whether the firm or the individual partner would bear the obligation — is currently unknown. Questions also arise around tax relief: while companies can deduct employer NIC as a business expense, it is not clear if any similar deduction would be available within a partnership framework.
Beyond compliance, the NIC on partnership profits proposal raises wider strategic concerns:
- Self‑employment principles: The proposal would blur the distinction between employment and self‑employment, effectively taxing entrepreneurial risk‑taking in the same way as salaried employment.
- Capital investment: Partners inject personal capital into their firms — often substantial sums — to finance operations and growth. A higher recurring tax on profit shares diminishes the return on that capital and may disincentivise future investment.
- Succession planning: Higher taxation on profits reduces available resources for funding partner buy‑ins and retirements, making succession within smaller or mid‑tier firms more difficult.
- Structural implications: Firms may increasingly look to incorporation as a means of managing tax exposure and improving cash‑flow flexibility, since companies can retain post‑tax profits without immediately taxing shareholders individually.
Tim Humphries our Head of Tax added, “If implemented, this reform could accelerate a shift away from traditional and LLP models toward corporate structures, with considerable implications for tax policy, firm culture, and long‑term competitiveness across the UK’s professional services sector.
We are monitoring developments closely and myself and my team will provide further guidance once the government’s detailed proposals are published alongside the Autumn Budget.
If you would like to dicuss NIC on partnership profits with us, or if you would like to discuss any area of tax compliance or planning, a member of our team is ready and waiting to help.
Autumn Budget 2025
We are waiting to see whether the Chancellor comments further on NIC on partnership profits further in her Autumn Budget and w will be producing our annual Budget report after the Chancellor’s Budget announcement on 26 November, we expect to have this complete by 9am on 27 November. We are also holding and invite you to join us at our free to attend post Budget webinar on 28 November.  If you would like to register to join us, you can do that here.
