Salaried members of LLPs: what you need to know
Members of a Limited Liability Partnership (LLP) are normally treated as self-employed for tax purposes. However, special rules can sometimes apply. Specifically, this happens where a member’s terms of membership look more like those of an employee than a traditional partner. In those cases, HMRC may treat them as salaried members of LLPs. As a result, their income is taxed under PAYE rather than as self-employed earnings.
How the rules work
To prevent disguised employment, the legislation applies a three-part test. Crucially, all three conditions must be met for the rules to apply. If even one condition fails, the individual is not caught by the regime. Therefore, understanding each condition is essential.
Condition A – Disguised salary
Firstly, the rules look at how the member is paid. Specifically, Condition A is met when:
- At least 80% of the member’s remuneration is fixed, or
- Any variable element is not genuinely linked to the LLP’s overall profits or losses
In other words, if the reward looks more like a salary than a profit share, this test is likely to be triggered.
Condition B – Lack of influence
Secondly, the rules consider how much control the member actually has. Broadly, Condition B applies where the member does not have significant influence over the affairs of the LLP. Consequently, junior members with limited decision-making power are more likely to fall within this part of the test.
Condition C – Insufficient capital stake
Thirdly, the rules examine how much capital the member has invested. In particular, Condition C is met where:
- The member’s capital contribution is less than 25% of their expected annual remuneration
Therefore, a meaningful financial stake in the LLP can help individuals fall outside the rules.
Who the rules apply to
To fall within the salaried members of LLPs regime, an individual must perform services for the LLP in their capacity as a member. In practice, many LLPs review their structures carefully. As a result, they often aim to ensure that at least one of the three conditions does not apply. This way, members can preserve their self-employed status for tax purposes.
Who the rules do not apply to
Equally, the rules do not catch everyone connected to an LLP. Specifically, they do not apply to:
- Companies that are members of an LLP
- Individuals who only invest capital in the LLP
- Former active members who no longer provide services but continue to receive a share of profits
Consequently, passive investors and retired partners are generally outside the regime.
Why this matters
Ultimately, getting the position wrong can be costly. For example, the LLP may face unexpected PAYE and National Insurance liabilities. Moreover, HMRC enquiries can be time-consuming and disruptive. Therefore, regular reviews of LLP agreements and member arrangements are strongly recommended. By acting early, you can plan with confidence and avoid unwelcome surprises.
Need help reviewing your LLP structure?
Our team can help you assess whether the rules on salaried members of LLPs apply to your business. Get in touch today to review your member arrangements and protect your tax position.
