The change could see some doctors and lawyers paying tens of thousands in tax for the first time
When Rachel Reeves delivers her next Budget at the end of November, it is rumoured she will confirm a £2bn tax rise aimed at the country’s highest-earners.
The Chancellor is reportedly preparing to impose a new national insurance-style charge on members of limited liability partnerships (LLPs) – a change that would hit about 190,000 lawyers, family doctors, accountants, and fund managers.
The proposal, first reported by The Times, would end what Reeves views as an “unfair” tax advantage for those who earn their income through partnerships rather than conventional employment.
At the centre of the plan is the Chancellor’s long-stated belief that “those with the broadest shoulders should pay their fair share”.
But while the Treasury sees this as a straightforward way to raise money and demonstrate fiscal discipline, economists warn that the measure could backfire – even prompting some of the wealthiest to move their work abroad.
Who could the new charges affect?
Under the current system, partners in LLPs are classed as self-employed and therefore not subject to the 15 per cent employer’s national insurance contribution. This creates a significant saving compared with ordinary employees.
According to the Centre for the Analysis of Taxation (CenTax), solicitors receive around a fifth of all partnership income, earning an average of £316,000 each in annual profits.
Accountants make about £246,000, and family doctors around £118,000. CenTax found that almost half of all partnership income goes to the top 0.1 per cent of taxpayers.
Under the plan being discussed, a solicitor earning £316,000 would face a new charge of about £23,000 – equivalent to an extra tax rate of 7.3 per cent.
Reeves is expected to argue that this would “equalise the tax treatment” between partners and employees, though the new rate would sit slightly below the full employer contribution.
Arun Advani, director of CenTax, told The Times: “Like so much of the UK tax system, the absence of employer NICs [national insurance contributions] on partners comes from a sequence of small accidents rather than deliberate design.
“Since partnership income is hugely concentrated, exempting partners from employer NICs is very regressive and simply means higher taxes for everyone else.”
Why Reeves is considering it
The Chancellor faces an estimated £30bn shortfall in the public finances, which she attributes partly to the lingering effects of austerity and Brexit.
Speaking to business leaders in Birmingham this week, Reeves said the Office for Budget Responsibility (OBR) would be “pretty frank” about the damage caused by both.
She said: “Things like austerity, the cuts to capital spending and Brexit have had a bigger impact on our economy than was even projected back then.”
The OBR is expected to downgrade Britain’s growth forecasts, adding to pressure on Reeves to find new sources of revenue. Her fiscal rules – designed to stabilise the debt – leave little room for manoeuvre.
Raising income tax, VAT, or national insurance directly would break Labour’s manifesto pledges. A targeted levy on partnerships could offer a politically defensible way to bring in more revenue without formally breaching those promises.
What are the risks of Reeves’s LLP tax plan?
Dan Neidle, director of the think-tank Tax Policy Associates, said the Chancellor’s proposed charge “makes sense in principle”, as taxing people differently based on their legal structure “is irrational”.
He noted that the measure “mostly affects high earners”, with “around 0.1 per cent of taxpayers receiving 46 per cent of all LLP income” and “98 per cent of the tax raised coming from the top ten per cent”.
From the Government’s perspective, the policy raises billions, appears progressive, and can be framed as closing a loophole. It also advances Reeves’s broader aim of showing fiscal responsibility while shifting away from “trickle-down” economics.
However, Neidle warned that it is “not without political cost”. He noted that “more reasonably paid professionals – like GPs – would also be affected”.
His analysis shows that a GP earning £118,000 could see their take-home pay fall by about £7,000 a year, while some of the wealthiest partners could pay tens or even hundreds of thousands more.
Neidle calculated that a solicitor earning £316,000 currently takes home about £180,000, but would fall to £155,000 if employer national insurance were applied, raising their effective tax rate from 43 to 51 per cent.
For a law firm partner earning £2m, take-home pay would fall from £1.07m to £914,000, increasing the effective rate from 46 to 54 per cent.
Neidle also warned of potential “behavioural responses”, including firms restructuring or shifting operations overseas. He suggested that some could incorporate as companies to save tax, while others might move work to jurisdictions such as Dubai or European centres where overall tax rates are lower.
Could Reeves offer a compromise?
To mitigate these risks, Neidle proposed a “messy compromise” that would protect GPs while retaining most of the revenue from top earners.
He suggested creating an exemption set at about £118,000 – the average GP partner income – so doctors would pay little or no additional tax.
“If the exempt amount were set at the average GP partner pay of £118,000,” he wrote, “I estimate this would reduce the yield from about £2bn to about £1bn.” Such an allowance, he argued, would be “politically safer” while maintaining the principle of fair taxation.
Neidle added that this approach “could actually prepare the way for the most principled change of all: applying employer national insurance to all forms of work, employed and self-employed”.
That, he said, would create a fairer and more coherent system – though “it would require deft political management and clear communication”.
