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.
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 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.
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