Chancellor Rachel Reeves’s proposed tax raid on LLPs may force partners to work longer or reconsider their retirement plans, with significant financial implications for many professionals.
It was reported last week that Reeves is looking to target limited liability partnerships (LLPs) for a tax raid as she tries to fill a fiscal black hole.
The proposed 15 per cent rate of national insurance contributions on LLPs, which currently don’t pay corporate tax on their profits, could add a £46,000 tax burden per partner.
Speaking to City AM, Eliana Sydes, head of financial life strategy at Y TREE, explained that if the Treasury goes ahead with this raid, after the usual tax deductions, partners will actually face an 8 per cent tax increase.
“We worked out that over a five-year period [the 8 per cent tax increase] is effectively adding 20 per cent to the remaining of people’s working life,” she explained.
She pointed out that having to pay this extra tax, which would normally be saved, has a compounding effect over time on people’s savings.
She said this is now forcing clients – mostly lawyers – to consider restructuring, which may include offloading to investments, reducing costs, or reconsidering pension payments.
Sydes pointed out that each plan is different depending on age; for an older partner, closer to retirement, the 20 per cent extra needed to work may be “pretty uncomfortable news to hear”.
However, like many businesses, the constant changes in tax rules by the Labour Government are causing frustration as they make “long-term planning difficult”.
Law firms may restructure
However, in the long run, the initial tax raid on LLPs will have only a short-term effect on the economy, as most of these firms will restructure into limited companies or general partnerships.
Sydes stated, “I think the big firms will just readjust pretty quickly. You’ll get a growth industry of people advising smaller practices on how to restructure quite quickly.”
“If I were an accountancy practice member, I’d be putting all my energy into designing solutions for GPs or small law firms or something, and how you could restructure quickly and efficiently,” she added.
She also pointed out that Reeves’ plan to tax LLPs for the first time since their creation 25 years ago may also potentially push younger professionals to reconsider partnerships due to reduced attractiveness.
I think this will bring many more questions to the younger generation. We always talk about the sort of 50-something, but if you’re a 30-something thinking about partnership, the ambition now suddenly looks 10 per cent less attractive,” she stated.