Salaried Member Rules: What you need to know if you’re an LLP

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Stephen Kenny, Blick Rothenberg


If you’re a member of an LLP, you need to watch out to avoid being caught unexpectedly by the Salaried Member Rules. Stephen Kenny (pictured) from Blick Rothenberg’s Financial Services team looks at the rules in more detail and explains what you need to know.

What is a Limited Liability Partnership?

A Limited Liability partnership (LLP) is a popular choice for Financial Conduct Authority (FCA) regulated businesses:

  • it has separate legal entity
  • it is easy to introduce new members/change profit sharing ratios
  • there is no liability to Pay As You Earn (PAYE) or Class 1 National Insurance Contributions (NIC).

With LLPs the members are Partners, not employees. This means that Partners are taxable on their profit share, not cash withdrawn. A LLP is designed to align the tax treatment of the individual members with a traditional partnership.

Why were the Salaried Member Rules Introduced?

Due to the tax advantages offered by LLPs, HM Revenue & Customs (HMRC) felt they were being exploited and so introduced rules to treat certain members as if they were employees. If a member falls within these rules they would be subject to PAYE and (NIC) on the amounts paid by the LLP.

Where do the rules apply?

These rules apply where the members don’t fail at least one of the below conditions:

Condition A – At least 20 per cent of the profit share is variable by the overall profit of the LLP

Condition B – Has significant influence and control over the affairs (business) of the LLP

Condition C – Capital contribution equal to at least 25 per cent of disguised salary

What are the challenges for businesses?

These rules can present a particular problem for businesses in the regulated sector in the early years as:

  • remuneration is often a mixture of fixed profits share/drawings and a bonus. Often more junior members will be offered guaranteed minimum draw, which is seen as necessary to attract the right individuals
  • the key decision making over the affairs of the LLP are restricted to the senior/equity members
  • in the early years a business is often funded by one (or a small number) of Partners, often with the other Partners making no capital contribution.

This means in the early years, when the business is often loss-making or has very low profit, the more junior members of the partnership will have guaranteed payments that are not linked to the profits of the business. They have no control over the strategic direction of the partnership, and they haven’t contributed capital.

Why does this matter?

If a member is within the scope of the Salaried Member Rules they are treated as an employee. This means their renumeration will be taxed through PAYE and the salary subject to class 1 NIC.

For the employer (LLP) this will effectively increase the cost of the remuneration by 13.8%. Further, if a member has been treated incorrectly HMRC could attempt to ‘gross up’ the payment and treat the amount received by the employee as net of tax. This would drastically increase the cost to the LLP and this is before considering possible penalties and interest.

The effect of treating members incorrectly can have serious financial implications for a business. If there is a risk members have been treated incorrectly a proactive approach can often secure a more beneficial outcome with HMRC.

It is important for LLPs to ensure all their members have been correctly classified and to review the position when there are any changes to the LLP structure.

Next steps

For more information, please contact Stephen Kenny.

Visit Blick Rothenberg’s Financial Services sector hub to find out more.

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