Labour government reverses planned LLP NIC changes

The Labour government’s plans to increase employers’ NICs has attracted high levels of controversy and with the increase imminent, the policy continues to do so. Originally private equity firms and professional services firms operating as Limited Liability Partnerships (LLPs) would also have been caught by the increases but this part of the policy has now been reversed. The U-turn comes just weeks before significant NIC increases will be taking effect on 6 April 2025 for other business owners.

This article explains what was announced for LLPs and also recaps what the NIC increases will mean for employers in the UK.

LLP tax U-turn explained

In February 2024, HM Revenue & Customs (HMRC) introduced changes to the tax treatment of LLP members, aiming to reclassify more partners as employees. Under the original rules, members would be able to maintain their self-employed status (and avoid employers’ NICs) provided that they met one of the following three criteria:

1. They were entitled to a ‘significantly variable’ profit share i.e. they faced an element of risk;
2. They had substantial influence over the way the LLP was being run; or
3. They had invested a capital contribution into the LLP of at least 25% of their fixed annual pay.

Initially, HMRC’s 2024 update removed the capital contribution exemption, retroactively threatening to reclassify many LLP members as employees, if this was the only criteria they met.

This would have meant many firms would have to pay employer NICs at 13.8% (rising to 15% in April 2025) on their partners’ earnings. The policy sparked a significant backlash from private equity firms, law practices, and consultancies who typically operate as LLPs. They argued that it created retrospective liabilities and penalised legitimate business structures. Many would have incurred hundreds of thousands of pounds in extra tax.

The reversal of this policy was confirmed in March 2025 by reinstating the original capital contribution exemption. Now, LLP members who meet the 25% capital investment threshold only can still retain their self-employed status, shielding firms from any retroactive NIC liabilities.

How are employers’ NICs changing?

This is an important U-turn for LLPs which have fixed income partners and it arrives just as all businesses are bracing themselves for significant NIC increases. Businesses with employees are bracing themselves for the increases.

Here is a summary of how employment costs will increase from 6 April 2025 and the financial impacts:

• Employers NIC rate increase from 13.8% to 15%. This adds £1.20 cost per £100 of taxable earnings to payroll costs;
• Lower secondary threshold drops from £9,100 to £5,000. This means employers pay NICs on earnings above £5,000 (vs. £9,100 previously);
• Employment Allowance increases from £5,000 to £10,500. This helps smaller employers offset costs but does not apply to larger firms;
• Worked example highlighting impact of NIC increase.

Example showing NIC increases for employers:

Employee earning £25,000:
2024/25 – NIC costs (£25,000 – £9,100) × 13.8% = £2,194
2025/26 NIC costs (£25,000 – £5,000) × 15% = £3,000 (£806 extra per year, per employee)

Employee earning £35,000:
2025/26 additional annual NICs = £926 per year per employee.

For private equity LLPs, the policy reversal means significantly higher wage cost increases for fixed income partners have been prevented. Consider what this tax rise would have been for a professional services firm with 10 fixed income partners, each earning £100,000.

Employer NIC costs if 10 partners are treated as employees
£100,000 – £5,000 × 15% = £14,250 increase per partner, per year = £142,500 total saved

Savings by firm is £142,500 because partners can retain their original self-employed status.

How can other employers prepare for the NIC increases?

Although LLPs won’t be affected in April in relation to their fixed income partners, all businesses, including LLPs in relation to their employees, must adapt to these higher costs.

Ultimately, although the Government’s reversal offers some relief to private equity and professional services firms, it does nothing to ease the pressure on other business owners.

If you would like to conduct a review of your business’ management accounting strategy, contact partners@rjp.co.uk.