NIC on partnership profits

It is rumoured that the Chancellor is considering charging more National Insurance Contributions or an equivalent levy on partnerships. The potential new charge on partnership has created uncertainty in the run up to Budget 2025.

The thinktank CenTax has suggested a 15% NIC charge on profits at a partnership level before distribution - aimed at harmonising the tax burden between self-employed partners and employees. It claims that this would translate to a 6.9% effective tax rate on partners' profits which could allow the Chancellor to raise an estimated £2bn of additional tax revenue from ‘those with the broadest shoulders’.

It is important to note that at this stage there has been no official confirmation regarding the proposals. Businesses may choose to adopt a ‘wait and see’ approach but there are several aspects to consider, not all of them financial.

Here, we highlight some key issues that a change to partnership NIC would create, and how partnerships might seek to respond in the medium and longer term.

  • How might a new charge be structured?
  • LLP to corporate – the financial pros and cons
  • LLP to corporate – business model comparisons
  • Cashflow concerns 

Even while the proposals remain uncertain businesses may wish to reflect internally on their rationale for operating within a partnership structure. The answer will be different for everyone, but this will be a key question in determining whether a partnership remains the most appropriate structure, regardless of what changes might be announced in the Budget.

Currently, partners operating through a partnership are classed as self-employed for both income tax and NIC purposes. They pay class 4 NIC on their earnings/profit but as they are not employed, their earnings do not suffer employer’s NIC which is currently set at 15%.

It could be argued that introducing a new charge at the partnership level will ‘even up’ the NIC treatment between a company employer structure and a partnership. There has been press speculation that such a new charge could apply to LLPs only. However, legislators may be concerned that excluding general partnerships from the new charge may lead to the creation of complex avoidance structures or that LLPs simply opt to return to general partnership structures.

It would be relatively politically risky to include NHS GP partnerships within these rules given existing pressures on the NHS. GPs could be specifically excluded from the new charge, or a profit de-minimis set to exclude smaller partnerships, and so most GP partnerships. Alternatively, the charge could be limited to practices with 30 or more partners for example.

The first option raises issues of ‘fairness’. Although the second and third options might seem fairer, they would need to be supported by rules preventing practice fragmentation. If size is used as a criterion, it could create a disincentive for partnerships to seek economies of scale or grow, which over time may make the UK professional services sector less competitive internationally.

The issues related to partnerships with international operations and partners raise more complexities. For example, would the current NIC treatment of non-UK source profits or regimes for non-UK partners continue alongside a new partnership NIC levy. There is the potential to create inequality between UK and non-UK partners. Also, how would profits allocated to a corporate partner be treated?

Clearly, the proposed levy is not straightforward and could create incentives to move from a general partnership or LLP to a corporate structure. Is there a more straightforward NIC based option for the Chancellor? A high rate, or progressive rates, of Class 4 NIC paid by individual partners on profits above a high annual threshold could be far less disruptive for partnerships. This approach would also be easier for HMRC to implement.

Any NIC increase will change the risk/reward balance for partnerships and could make a corporate structure more attractive to some and, perhaps, make overseas tax jurisdictions more 


The introduction of higher overall NIC charges on profits may mean that an LLP is no longer the optimal structure for a firm. The financial implications will need to be modelled and forecast across alternative structures before realistic comparisons of different structures can be made.

For example, corporation tax rates are not expected to change in the near future but future rises in income tax rates and dividend tax rates will need to be factored in. Especially as there are rumours that income tax rises might also be part of the revenue raising mix on Budget day.

Alongside the relative tax rates, firms should also consider the other financial benefits a corporate structure might afford such as the impact of disallowable expenses that most partners currently face, reducing taxable liabilities.

The cash flow benefits of being able to retain working capital net of corporation tax rates (rather than financing working capital from partner’s individual post tax and NIC profits) could be substantial. This will be a significant factor for partnerships with substantial growth and investment plans. The flexibility over the timing and quantum of distributions that a corporate model offer may also be advantageous in the longer term.

For most businesses, tax is not the key factor in adopting the partnership model. A partnership structure works well for many businesses because it enables partners to succeed together in shared efforts and then pass on the business to the next generation without triggering tax charges. A partnership is often also about the firm’s culture.

In any decisions regarding structure, firms will want to take into account the non-financial features of a partnership such as its flexibility, autonomy, shared ownership and culture. Would shareholding directors be able to, or wish to, behave in the same way as partners?

On the other hand, private companies have significant flexibility over capital structure and shareholder rights. So it may be possible to create a share-based ownership structure that, to some extent, echoes the partnership agreement. Is there another form of ownership structure, such as an employee ownership trust for example, that could be a better fit for the business? Whatever the conclusion, shareholder agreements and entry and exit arrangements for quasi ‘partners’ in the new structure will require considerable thought.

Disputes within the business would likely be more difficult to manage within a corporate structure of shareholder-directors as all individuals would have stronger legal employment rights and protection than with a typical partnership agreement.

Incorporation could also enable more sophisticated remuneration strategies, such as bonus structures and long-term incentive plans, for key individuals. These are currently challenging to create within a full distribution partnership model. Share related incentives for staff at lower levels may also be attractive in the longer term to help retain and reward employees.

The typical cashflow cycle of a professional service practice will mean that billed profits become liable to NIC before cash is collected from customers. This is true whether a further NIC charge is imposed on partnership profits at partnership level or individually on partners. Funding this cashflow cycle will therefore become more of a financial concern.

Similarly, we are still in the ‘spreading’ period for transitional profits charged under basis period reform. Partners who elected to spread the transitional profits over 5 years could now end up paying higher NIC on the transitional profit in future years than they would have paid by including it all in the 2023/24 tax year. If a new NIC charge is implemented, most individuals will no doubt wish to elect out of spreading to unwind this position but would need to fund the extra tax and NIC due for 2023/24 in one hit.

Preparing for a NIC levy on partnerships

Previous attempts to align the taxes of the employed and self-employed have demonstrated how complex the process would be. It seems probable that a period of consultation would be needed before a levy can be implemented. Even the simplest option of a change to Class 4 NIC is unlikely to take effect until the 2026/27 tax year.

This would mean that partnerships are able to set aside time and resources to assess and model the potential impact of higher NIC on their profits. Firms should explore the range of alternative models and what the process would be for making structural decisions. It will be necessary to engage with partners on the issue and prepare them for potential changes ahead. If the levy is announced in the Budget and more detail is provided, there may be a lot to do for partnerships.

If you need or would like help and advice on preparing for a possible NIC change, we would be delighted to discuss how we can assist you. Please get in touch.

To keep up to date with the latest predictions or to see whether the NIC changes are going ahead, visit our Budget hub.

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