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National Insurance increase and salaried member review retests

Deadlines to be aware of

Louis Baker, Partner, Head of Professional Practices
21/02/2022
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The 1.25% National Insurance Contributions (NIC) increase from 6 April 2022 will make salaried members even more expensive for a firm. It will be even more important than before for firms to make sure that members are not regarded as salaried members, unless that is the position the firm is content with.

The deadline for re-testing Condition A will be within the next two or three months for most firms and 6 April 2022 as well as the firm’s year-end date for Condition C.

Don’t forget that any existing member who might need to subscribe additional capital to meet the Condition C test will need to have done so before the test date. There is no period of grace unlike for new members who must commit to subscribing their capital when they join and actually subscribe the capital within two months of joining.

As a reminder, the salaried member tests need retesting at least annually.

Members of an LLP should be taxed under PAYE as a salaried member unless they fail one of the following tests:

  • Condition A: at least 80% of their income is of disguised salary
  • Condition B: they do not have significant influence over the affairs of the LLP
  • Condition C: their capital is not at least 25% of their disguised salary.

If the answer to at least one of the above tests is 'no', the member should be taxed as a self-employed partner.

Pass all three tests and the individual is a salaried member to be taxed under PAYE, with the burden of Employers NIC at 15.05% (plus 0.5% Apprentice Levy if applicable) due on the total reward of the salaried member along with potential pension auto-enrolment and administration issues for the LLP.

Conditions A and C are forward-looking based on reasonable expectation.

Condition A should be tested at the start of the firm’s profit-sharing period, which HMRC expects to be the financial year for most firms. The test looks at the reward each partner expects to earn for the profit-sharing period, and the extent to which it is disguised salary.

Condition C should be tested on 6 April, looking at the reward each partner expects to earn for the year to the following 5 April, and compared with the level of capital subscribed to the firm.

What other times will you need to retest?

Retests are also required on a variety of other occasions such as:

  • when a member joins the firm
  • when the firm’s profit share arrangements change
  • the management structure changes
  • when a member’s status changes.

An amount within the total amount is disguised salary if:

  • it is fixed
  • it is variable, but varied without reference to the overall amount of the profits or losses of the LLP (for example bonus awards based upon a partner’s billings) or
  • it is not, in practice, affected by the overall profits of the LLP.

Firms should take care to document their salaried member compliance and retest reviews, so they are available when HMRC checks a firm’s compliance with the legislation.

For more information, or to discuss the application of the salaried member legislation to your firm’s circumstances, get in touch with your usual Crowe contact.

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Louis Baker
Louis Baker
Head of Professional Practices
London