Employer NICs for partnerships?

Rumours and press speculation are currently focussing on the prospect of an increase in NICs for partnerships as a way that the Chancellor might raise up to around £2bn in the November Budget. The prospect of “employer NICs” for partnerships may seem something of an oxymoron given that, by definition, partners are not employees, but partnerships (in particular LLPs) are currently used by many large professional service firms, such as solicitors and accountants, as well as being the vehicle of choice for most asset management businesses. As such, these targets might be seen as attractive to the Chancellor who has indicated that those with “the broadest shoulders” should bear their share of any tax rises expected in the Budget.

It remains the case, of course, that there is some uncertainty as to whether the Budget might include any such measure and, if so, from when it might be introduced and how any proposal would actually be implemented.

Background

The difference in tax treatment for employees and the self-employed has long been a feature of the tax system. In particular, the self-employed, including those operating in partnership, do not pay employer NICs (as they are not employees and so there is no employer). The difference in tax treatment of employed and self-employed have largely been justified by the historical differences in state benefits that accrued to the employed compared to the self-employed (although arguments have also been made that the status of self-employment carries more entrepreneurial risk and fewer legal protections than that of an employee). With the Chancellor recently increasing employer NICs to 15% this is now an increasingly significant advantage and one that is harder to justify. Political attempts to address the difference have largely fallen into the bucket of “too difficult to do”, however. Chancellor Phillip Hammond proposed a small increase in Class 4 NICs on the self-employed in 2017 on the basis that the self-employed and employed workers have increasingly similar access to state benefits, but was forced into a rapid U-turn. In 2019, the Taylor Review into self-employment and the gig economy recommended that the taxation of labour should be made more consistent across different employment forms. Again, however, the government shied away from any form of alignment of taxation and employment rules, whether on status or taxation, noting that any such changes would be complex and require careful consideration.

Previous governments have, of course, also taken targeted action, with the salaried member rules, introduced in 2014, designed to remove the presumption of self-employment for some members of LLPs and so tackle the “disguising” of employment relationships through LLPs.

It now appears that the Chancellor is considering returning to the issue of the difference in treatment of the self-employed and employed, albeit in a typically piecemeal fashion.

What form might partnership NICs take?

Two recently published reports may provide an idea of how the Chancellor might choose to introduce “Partnership NICs”.

A report by CenTax from September 2025, calculates that the effective tax rate on employees (taking into account employer NICs) on income above £125,000 is 53.9%, whilst for partners it is only 47%. This difference is smaller than the headline rate of employer NICs (15%) for two reasons. First, the effective rate of employer NICs is 13.04% rather than 15%, when expressed as a percentage of the employee’s gross income. Second, employer NICs reduce the taxable income on which income tax and employee NICs is due, which mitigates their impact on the employee’s overall effective rate.

The CenTax report proposes the introduction of Partnership NICs to levy an amount of tax equivalent to that (indirectly) suffered by employees as a result of employer NICs. The report suggests that, due to the tax transparency of partnerships, the Partnership NICs charge should be applied at the partner level as a “top-up” rate on partners’ income tax payments, applying a rate of 13.04% to a partner’s net profit share. This would result in an increase to the effective rate of tax of 6.9% on partnership profits taxed at the additional rate, 7.6% for those taxed at the higher rate, and 9.6% for those taxed at the basic rate (a strangely regressive approach, given the lower effective tax rate to which those profits are currently subject).

Another report by Demos from September 2025 suggests that the Chancellor might add an additional category of NICs to ensure partnership businesses pay the same rate of employer NICs for their partners as businesses do for their employees. The Demos report has less consideration of the detailed method in which this measure might be implemented, simply noting that to ensure partnership businesses pay the same effective rate of NICs for partners as businesses do for employees, a new category of Class 1 NICs should apply specifically to partnerships, charged to the business at 15% of the remuneration paid out to partners. This goes on to recognise that a 15% NICs charge at the partnership level would be equivalent to 13.04% of the pre-tax remuneration which would otherwise be paid to partners (given that the tax itself reduces the remuneration paid out to partners). Accounting for the reduction in income tax and self-employment NICs due, the report calculates that this reform would increase the effective tax rate on partners by between 7 and 10%, the equivalent figure recognised by the CenTax report.

Both reports suggest that certain allowances may be available to reduce the amount of profits that would be the subject of any Partnership NICs charge.

When might any change be introduced?

It is usual, though not inevitable, that changes to income tax and NICs are normally introduced with effect from the start of the tax year in April. It seems, therefore, unlikely that any such change would be introduced before April 2026. This is particularly the case given that this would not simply be a change to the rates, but a significant structural change to the tax system. Indeed, in normal circumstances the government might be expected to consult at length on any such change, however the need to raise taxes may persuade the Chancellor to expedite any such measure.

Comment

Of course, partners are only a small part of the self-employed workforce who currently benefit from the NIC differential compared to employees, which begs the question why the government would not seeker wider reform affecting all self-employed. The Demos report recognises that “this reform would simply create a new gap in the tax system between partners and sole traders. While we accept that this gap should also be addressed in the long-term with a fairer balance in NICs between the employed and self-employed in general, we recognise the political challenges in doing this all at once (the fact it has not happened despite consistent consensus among economists is testament to that)”.

The Government should also consider the potential for unintended consequences. The last two years have seen significant migration from the City to the UAE and Milan, for a range of factors including to take advantage of the attractive local personal tax regimes. It might be argued that the Government would be better to focus on how to reverse that trend, rather than to introduce measures which may well exacerbate it.