Budget 2026: why we’re firmly opposing a potential new tax on LLPs

The government may extend the equivalent of employer national insurance contributions (NICs) to limited liability partnerships (LLPs) in the upcoming budget on 26 November, according to a recent article in the Times.

It is pre-budget speculation. But we have found out through our own endeavours that it is being considered by the Treasury. We are treating this as a meaningful threat to our members until it is confirmed otherwise.

The Resolution Foundation has since put forward a conservative estimate for cost to LLPs in the region of £1bn.

The chancellor Rachel Reeves has suggested those with “the broadest shoulders” should pay their “fair share” of tax to make up a £39bn shortfall in public finances.

The danger is that this proposed tax assumes that highly-paid city firm partners are currently receiving a perceived tax break by nature of being an LLP. It is much more complicated than that – and its reach would potentially extend far beyond the City.

The sector is already dealing with major regulatory changes in anti-money laundering and compliance, as well HMRC’s proposed tax adviser registration.

Adding further burdens now risks creating a perfect storm that limits firms’ ability to invest, hire, and contribute to growth.

The LLP balance

It is wrong to assume that the current LLP model gives firms a material tax advantage.

Effective tax rates for partners in LLPs already approach or exceed 50% due to disallowable expenditure, which is fully taxable at 47%. Reinvestment by partners is also out of their post-tax income, which increases their effective tax rate further.

Although a shareholder in an incorporated owner-managed business might face an effective tax rate of around 54.5%, most incorporated businesses benefit from significant reliefs – such as full expensing, lower tax rates on disallowed expenses, and greater flexibility to reinvest or realise value through capital gains taxed at much lower rates.

These advantages can reduce their effective rates below those faced by LLP partners.

Upsetting the balance of the LLP structure, particularly for a theoretical sum of money, which in practice won't be realised, is a dangerous thing to do.

It will lead to behavioural change – where firms consider changing their structures. CenTax estimates this at an optimistic 20%. But combined with the mix of regulatory changes, we could be looking at many more.

We might also see offshoring. Some of these firms have got offices in 70 jurisdictions outside of the United Kingdom. They can move quite a lot of their taxable operations elsewhere.

Derailing the growth of our profession

The global success of our law firms is to do with boldness, the ability to move into new territories, and move into new areas of work or practice. It is underpinned by the strength of English law.

The UK’s dominance in international law – around 40% of global business and financial transactions are governed by English law – is in part based on sensible business models such as the LLP which actually share risk and investment needs.

The shared owners of these LLPs must put in quite a lot of their own money upfront. It’s a very personal risk and the current tax treatment supports this investment.

The LLP is a model that allows quite a complicated business to move forward, by fostering sustainable relationships with clients and mentoring employees-turned-partners along the way.

Hitting LLPs with a new tax is at odds with the government’s industrial strategy, which recognises legal services as a key partner to delivering international growth.

What our members say

Like us, the LLP partners we’ve spoken to understand the notion of those with “the broadest shoulders” paying their fair share of tax.

But they feel the notion of an LLP tax break is a misrepresentation.

They don’t feel at home being treated as employees or company director-shareholders and say the role can’t be categorised and taxed as one or the other.

There are concerns that should firms be forced to become a limited company, the culture and ethos of the way these firms have worked for many years would be lost.

How we are engaging with government

In response to the speculation, we’ve written to the chancellor, the secretary of state for justice and the secretary of state for business and trade.

We’re taking a cross-departmental approach to making distinct and specific cases on behalf of our members.

We’re in touch with the Department for Business and Trade (DBT), charged with leading on the growth agenda.

We’re raising concerns about access to justice with the Ministry of Justice (MoJ), as this measure will hurt already beleaguered legal aid firms which offer local public services to our communities. We’ve assessed Legal Aid Agency data that suggests at least 20% of family legal aid firms and 10% of criminal legal aid firms are LLPs.

We’re working with our members to ensure sure that their voices are heard. We have the assistance of our tax law committee and other interested parties.

We're working in alliance with others such as the City of London Law Society, City UK and others.

Earlier this month we held a meeting at the Law Society with the Professional and Business Services Council, which is an advisory body to DBT, where ministers were present to hear our concerns.

We ensured that there was a coordinated voice between us representing the legal sector, the Royal Institute of British Architects, the bodies representing the accountancy industry, KPMG, PwC, and some of the large law firms.

We’ll continue these activities as well as speaking to media over the coming weeks.

How your firm can get involved

In addition to our campaigning on behalf of members, we’d encourage all members affected by this to make their views known on this issue to the government via direct or indirect means.

We know some of our larger firms have already taken action. Smaller firms should consider approaching their local MP or mayor on the issue to make representations on their behalf.

This is something the Law Society can help you with, so please get in touch if you require any assistance: parliamentary@lawsociety.org.uk.

What’s next

There is a wider question on what the right way to tax law firms is – to encourage investment in technology, to create jobs.

Our economic research shows our sector employs 1.6% of the UK workforce and generates £9.5bn of foreign earnings.

There is a real opportunity for the government to generate extra tax revenue through the continued growing success of the legal sector on a long-term basis.

Fundamentally, we want the government to withdraw this proposal.

One of the alternatives we can offer the government is just much better dialogue between us, the Treasury and the DBT on a tax model that supports growth and ensures a progressive, sensible, pro-investment tax system. Many of our members would support that.

If this measure is announced on 26 November, it won’t necessarily be incorporated into the Finance Bill. It would likely be brought in via another type of legislative framework. If so, there may be a second stage we could fight.

Many of our members are expert tax advisers. This has been a great benefit to our campaign. We are rather gifted in this respect. As a voice, as a sector.