Dividend tax rates could be the chancellor’s next target if she proceeds with plans to end LLP member tax breaks, a leading adviser to professional services firms has said. The warning came as the City of London Law Society added to calls for Rachel Reeves to get around the table with law firms before she commits to the ‘short-sighted’ measure.
Andrew England, business tax partner at accountants Menzies, warned that many firms risk being overlooked in policy design - potentially harming not just business owners, but also employees and consumers through reduced opportunities and higher prices. 'With many firms now expected to switch to limited company status, the question arises: could dividend tax rates be the chancellor’s next target?,' he added.
England said: 'The proposed “partnership NIC” regime effectively adds a top-up tax on partnership profits (9.6% basic rate, 7.6% higher rate, 6.9% additional rate), on top of income tax and national insurance on self-employed profits. Although aimed at LLPs in high-earning professions, its scope risks wider economic fallout. Many firms including dental and GP practices, law firms and accountancy practices are often structured as partnerships and could be overlooked in policy design.
'In practice, business owners are likely to pass the cost on through higher prices and lower cost bases - lower salaries, reduced bonuses, and tighter recruitment budgets - hitting staff as well as partners. LLPs have already faced a 1.2% increase in employer NIC this year, so this is a double blow.'
England argued that the policy penalises partners who ‘risk their own capital, stripping LLPs of reinvestment capacity and damaging their ability to grow, expand, or reward staff’. To proceed without consultation 'would risk damaging not only the affected firms but also the wider economy', he added.
England’s was echoed by the CLLS. ‘We hope that the government will first engage in constructive consultation with the legal and professional service sectors before they consider introducing such a change to the tax regime,’ said chair Colin Passmore, former senior partner of Simmons & Simmons. ‘What business – including the legal sector – needs above all else is certainty, and this sort of speculation is unhelpful for those who already contribute huge sums to the exchequer.’
He added: ‘This government repeatedly says that it wants to focus on growth. Yet this sort of short-sighted tax change for LLPs would negatively affect the competitiveness and status of London as a global hub for law. We are talking about a sector that has for a long time been a critical motor of the UK economy, generating billions in economic value and a trade surplus through legal exports. We must ensure it remains a global leader in the face of aggressive competition from other jurisdictions, not disincentivise growth through a piecemeal approach to tax reform.’
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