There’s a lot of careful consideration that goes into the creation and development of a Limited Liability Partnership (LLP). Determining the status of the partners is one part of this, and National Insurance Contributions (NICs) is a factor in this consideration.
Partners are expected to pay tax and NI on taxable profits allocated from the partnership, and the tax applied to partnership income falls at the same rate as employment income (20%, 40%, 45%, etc). For those who are treated as self-employed, a tax return must be filed, and initially a form SA401 must be submitted to HMRC, notifying the tax office of the individual’s partnership status.
What Rate of NI Do Limited Liability Partnerships Pay?
Generally, individual partners in a partnership are treated as self-employed for tax purposes and will pay Class 2 or Class 4 NICs on their profits. These payment dates are scheduled at the same time as the tax due on payments on account (31 January within the tax year, and 31 July after the end of the tax year).
However, with LLPs, there may be cases where partners are essentially employees (a salaried partnership) rather than a partner in a traditional sense and could find themselves taxed under Pay as You Earn (PAYE) and paying Class 1 NICs.
This can only occur however, if certain conditions apply:
- If the Partner receives payment that is more like a salary than a share of the business profits
This requires the amount to either be fixed, variable but without reference to the overall amount of the profits of the LLP or is not affected by the overall profits / losses of the LLP.
It’s important to note that payments on account of a profit share are not treated as a disguised salary, and the payments are contingent on future profits being made.
- If the Partner does not have significant influence over the LLP. If a Partner is involved in the day-to-day management or operations or can exert influence over strategic decisions of the business – this is considered to be significant influence and does not qualify for this condition.
- If the Partner’s capital contribution is less than 25% of the disguised salary which it is reasonable to expect will be received in return for their contributions to the LLP. Partners who are new to the LLP are allowed two months in which to contribute capital.
If all of these conditions are met, then for tax and NI purposes, the Partner must be treated like an employee, with the payments treated as a salary under PAYE and Class 1 contributions made by the Partner, and secondary Class 1 NI payments made by the LLP.
Since 6 April 2015, inactive members of an LLP have been treated the same for NICs purposes as Sleeping Partners and inactive Limited Partners in conventional Partnerships, and are liable for Class 2 NICs, and liability for Class 2 NICs is no longer a determining factor in determining if an individual operates through an LLP or Partnership. The meaning of ‘employment’ (for the purposes of Parts 1 and 6 of the Social Security Contributions & Benefits Act 1992) was amended to include membership of an LLP carrying on a trade, profession, or business – with a view to a profit.
Unless the exception for Salaried Partners applies, then active LLP members are automatically treated as self-employed and subject to the appropriate class NICs (2 or 4), and if they have not already registered with HMRC as self-employed, they are legally obliged to do so.
Understanding your obligations and ensuring that your LLP is compliant is an essential step that you must take. If you need help, advice, or a trusted, experienced accountant to manage these complicated steps, then you’re in the right place. Get in touch with our team today and book a consultation with one of our qualified experts.