Proposed National Insurance reforms for partners in partnerships
The rumour mill is at full pelt regarding the potential changes that Chancellor Rachel Reeves will announce in the 2025 Autumn Budget.
The tax landscape for partners and partnerships could be set to change with the potential introduction of a new charge akin to Employer’s National Insurance Contributions (NICs) on partners’ profit shares.
This potential move, inspired by a September 2025 report from the Centre for the Analysis of Taxation (CenTax), aims to ‘equalise the tax treatment’ between partnership partners and employees, potentially raising £1.9–£2 billion annually.
Current NIC treatment of partners of partnerships
Partners in partnerships are typically treated as self-employed for tax purposes, paying Class 4 NICs on their share of taxable profits.
Employer NICs (Class 1 Secondary) are not levied unless a partner is deemed a ‘salaried member’ of a Limited Liability Partnership (LLP) under HMRC’s three-part test.
This structure has long created a tax advantage over limited company structures, where employer NICs are charged at 15%.
The CenTax proposal: Partnership NICs
CenTax recommends applying a new ‘Partnership NIC' via a partners Self-Assessment tax return. The rate is dependent on the marginal tax rate of the partner.
- 6.9% for additional rate taxpayers
- 7.6% for higher rate taxpayers
- 9.6% for basic rate taxpayers.
The proposal is designed to mirror the NIC burden that would apply if the business was structured as a limited company.
A partner earning £200,000 the additional tax and NIC liability will increase by £13,800.
Political and fiscal context
The potential reform would be part of a broader effort to plug a fiscal gap estimated at £30–£50 billion. Reeves has reiterated Labour’s commitment not to raise income tax, personal NICs, VAT, or corporation tax rates, but employer NICs were not ruled out.
The partnership NIC proposal would be seen as a politically palatable way to raise revenue from high earners without breaching manifesto pledges.
Sectoral impact
Impacts all businesses operating as a partnership and is aimed primarily at the professional and business services sector; legal, accountancy, intellectual property, patent attorneys, surveyors, actuaries, managing consultants, engineering, financial services, medical partnerships and private equity firms.
Taxable, accounting and distributable profits
Employed individuals are taxed on income that is distributed/paid out to them and it is on this that employers NIC is based on.
Partners are assessed to tax on taxable profits, not accounting profits; adjustments are made to accounting profits, in particular disallowable expenses and are allocated to partners and they are taxed on these adjusted profits, ‘taxable profits’.
There is usually a time lag between paying out profits to partners, which can be months and years after the profits have been earned. Each firm is different and will depend on the firms policy for distributing profits and cash flow.
Capital contributions and risk
Partners generally contribute partnership capital into the firm, which usually ranges from £50,000 - £500,000. This contribution is at risk.
Employees do not put capital into a business.
Employment rights
Partners of a partnership are self-employed individuals and are not entitled to employment rights. In line with this status, the firms are not subject to employer NIC on the partners profit shares.
Bringing in an additional NIC charge on partners will create an unlevel playing field in the professional services sector, with partners being assessed in a different way depending on where they and their partnership is based.
Foreign entities operating in the UK
UK-based partners who receive a share of their income (at times substantial) from foreign based firms are typically earning foreign sourced profits. These profits are not subject to NIC and hence would not pay the additional tax charge that is being proposed.
Non UK resident partners
Receiving partnership profit share from a UK partnership are exempt from paying NI and hence would not pay the additional tax charge that is being proposed.
Exempt businesses
There is chatter that certain partnerships operating in a specific industry will be exempt, like farming and medical doctors. Where will the line be drawn?
Will professional services firms change their structure to mitigate the additional charge?
Firms will not want to stand still, but will want to seek out and model other structures, which would include:
- Chambers style – become more akin to barristers’ Chambers?
- Operating out of a foreign LLP entity?
- Traditional partnerships - There is talk that partners in traditional partnerships will be exempt from any new charge, so will we see LLPs converting back to traditional partnerships?
- Incorporate into a limited company?
The potential reforms represent a significant shift in the taxation of partners and partnerships. While aimed at fairness and fiscal sustainability, they risk undermining the competitiveness of the UK’s professional services sector.
In my opinion, bringing in an employer NIC style charge to partnerships is likely to stifle growth, hinder succession and cause firms to change behaviours to mitigate the charge.
Depending on the implementation date of any proposed change, we could see firms changing their accounting date to maximize the profits that are not subject to any reform. With that in mind, one potential action point to take is not to file accounts until after Budget Day, when we find out what the landscape ahead looks like for partnerships.
The impact across the sector will be huge and the unintended consequences have not yet been thought through fully. Hence I do hope that if this is a route that the Chancellor is keen to go down, a consultation is issued and time is given for the sector to assess fully and to report back to the government.
If you would like to discuss further, please contact your usual Crowe contact.
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