The Chancellor is reportedly considering a plan that could reshape the way professional partnerships operate in the UK. Proposals from the Centre for the Analysis of Taxation (or Centax) suggest that imposing employer National Insurance Contributions (NICs) on partnerships could be announced in the upcoming Autumn Budget; a move that could raise almost £2bn annually and impact around 170,000 professional practices, including GPs, lawyers, accountants, financial advisers and farming partnerships.
Framed as a corrective measure to instil fairness throughout the spectrum of NIC contributions, the report argues that companies already pay NICs while partnerships do not, describing the current exemption as “a particularly conspicuous anomaly” and “an accident of history”. There has always been an intentional disparity between the self-employed and the employed; however, so if anything, this may create more disparity (for example, with sole-traders) rather than less.
98% of the revenue from the proposed reform would come from the top 10% of UK earners, so it can be seen why the paper is using the claim that this disparity actively distorts the economy and stifles productivity to justify the increase. The Chancellor may well set out to align tax treatment across business models in an effort to encourage growth - but what would this mean for the vast majority of the nation’s partnerships? Let’s hypothesise.
According to the author of the official report from Centax, the proposal would introduce NIC on partnership profits - but only in situations in which they exceed £90,000 profits. This threshold means larger businesses, particularly in London and other city centres, would carry most of the burden.
To put this in another way, in 2020, 1,800 partners in Kensington received over £1.8 billion in partnership income, exceeding the profits of all 65,000 partners in Wales and Northern Ireland combined.
Alison Smith, director and head of business services at Duncan & Toplis, highlights an important point from the policy report: “Partnerships are often viewed as less growth-friendly than companies, since profits can only be reinvested after partners have paid tax. Although large city law, accountancy and financial service businesses would shoulder most of the burden of such a reform, they would also affect smaller professional practices, GP surgeries and farming partnerships.
“The real question is, can these sectors absorb the extra cost without passing it on to clients or patients? Will this drive more businesses to incorporate, or can the partnership model adapt to survive? And, finally, is it fair to single out partnerships when sole traders are not included in the proposals?”
For many in professional services, the fairness argument cuts both ways.
While proponents may see the measure as levelling the playing field with companies, opposing views may well argue that it is inherently inconsistent - and that’s a fair point. Sole traders, who also benefit from different treatment, are not included in the plan, for example. Why are the lines in the sand being drawn so haphazardly?
As I see it, this inconsistency could well fuel backlash by drawing ire from fed-up business owners. It would seem especially inequitable to introduce this rule for partnerships and not sole traders, given the theory behind the structure. I imagine that may form part, if not the entire basis, of the critical consensus against such a measure if this is announced come November.
If the proposals are implemented, partnerships will need to think very carefully about their future structure.
Incorporation, which already appeals to many professionals, could suddenly become even more attractive. For others, it may well mean recalculating profitability, and cautiously considering how additional costs can be managed, or assessing how client pricing strategies would need to adapt to accommodate the new rules.
It’s also entirely possible, and indeed likely, that some sectors would be treated differently in practice. For example, while GPs could be reimbursed through NHS funding to protect their take-home pay, no such relief would be available for lawyers, accountants or advisers. That discrepancy may add to a sense of frustration across the professions. In this sense, the government should be aware that equality is often misleading in terms of tangible pay and budgeting; in this sense, only equity across the board will do.
Let’s be very clear: this is not yet confirmed to be in the taxation pipeline. The policy is still only under consideration, and no final decisions have been made ahead of the autumn Budget - making this an informed heads-up for partnerships and not a dire warning of impending change.
However, the scale of the Treasury’s £50bn funding gap makes new revenue-raising measures highly likely, so this could very feasibly be on the cards.
With Centax’s analysis already reshaping political thinking, partnerships would be wise to prepare for this possibility. It’s also worth noting that, due to the high density of such partnerships which eclipse £90k in profits which are primarily in London, that this (proposed, entirely theoretical measure) feasibly may not impact two-thirds of UK partnerships; Centax’s report states that 66% of current partners would have no tax to pay, due to the proposed Partnership Allowance and Partners’ Exempt Amount.
At Duncan & Toplis, our role is to help clients navigate these kinds of seismic structural shifts. Incorporations may look more favourable, but each option comes with its own unique tax, regulatory and operational considerations that must be explored. The best approach will vary depending on the size, sector and goals of each partnership - and, invariably, by your industry, location and practice.
We must consider that, ultimately, a policy designed to close a perceived gap in the tax system could end up transforming how professional services and other partnership-based businesses operate. While there is still uncertainty, this is an opportune moment for business leaders to explore their options, model potential outcomes, and ensure they are ready to respond quickly if the Chancellor moves ahead. They don’t necessarily need to act now, but the next two months could well be the litmus test they need to gauge which direction they choose to take their partnership in if (or indeed, when) this sweeping reform comes to fruition.
At its heart, this debate isn’t solely about fairness in the tax system; it’s about the future of a business structure that has underpinned some of the UK’s most trusted professions, and whether or not it is sustainable.
Partnerships have long been valued for collaboration and shared responsibility, so if this policy takes shape, they will need to decide whether that model still serves them best in a changing tax environment - or what their next moves will look like as they take their first tentative steps on uncertain footing.
If you’re involved in a UK partnership, get in touch with our team of tax experts today.
