Note
This article covers direct taxes only and does not address VAT or other transaction taxes.
Limited Liability Partnership, or LLP, is a business structure that enables its members the benefit of limited liability while being treated as a partnership for tax purposes. This means each member's personal assets are protected from the debts and liabilities of the business, in the same way as a shareholder in a limited company.
It is a popular choice for professional services firms, consultancies, and other businesses where owners want to share profits directly rather than through a company and dividend structure.
This article explains how LLP taxation works, sets out five key tax benefits of the LLP structure, and highlights the key issues business owners should consider in practice.
Key Takeaways
How Are LLPs Taxed in the UK?
Where an LLP carries on a trade, profession or business with a view to profit, HMRC treats it as tax transparent. That means the LLP is not normally taxed on its trading profits. Instead, the profits are allocated to the members, who are taxed personally on their respective shares.
The LLP does, however, have compliance obligations. If HMRC issues a notice requiring a partnership return, the LLP must file a partnership tax return (form SA800) setting out the partnership’s income and how profits have been allocated among the members. In practice, active LLPs will ordinarily be required to file an SA800.
Each member is then assessed on their share of the profits and must file their own tax return or, if a member is a company, account for its share under the corporation tax rules.
Additionally, the LLP must file a confirmation statement and annual accounts with Companies House.
The table below sets out how income is taxed in each structure.
LLP Member
Limited Company
Who pays tax on profits? | The individual member, through self-assessment | The company pays corporation tax; shareholders pay further tax on extraction |
Tax on trading profits | Income tax at 20%, 40% or 45% on the member’s share (England, Wales and Northern Ireland; different rates apply in Scotland) | Corporation tax: 19% small profits rate (profits up to £50,000), 25% main rate (profits over £250,000), with marginal relief in between |
Tax on profit extraction | No further charge | Dividends are taxed at income tax rates of 10.75%, 35.75% or 39.35% |
National Insurance | Class 4 NIC is charged on tax-adjusted trading profits from self-employment: 6% on profits between £12,570 and £50,270, then 2% above £50,270 | Class 1 employee NIC is charged on earnings, such as salary and bonuses: 8% between £12,570 and £50,270, then 2% above £50,270, while dividends are not subject to NIC |
Employer NIC | None | Employer NIC is charged at 15% on all employee earnings above the secondary threshold of £5,000 per year |
Class 2 NIC | No longer payable for most self-employed individuals from 2024/25; voluntary contributions may be made where profits are below £6,845 and the individual wants to protect their state pension record | Not applicable |
Dividend tax rates from 6 April 2026
From 6 April 2026, the ordinary rate of dividend tax increased from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%. The additional rate remains at 39.35%. This change increases the cost of extracting profits from a limited company through dividends.
Important
LLP members are taxed on their allocated share of profits, whether or not those profits are drawn out of the business. This means a partner may have a tax liability that is higher than the cash they have actually received in the year. It is important to plan for this and ensure sufficient funds are set aside to meet tax payments when they fall due.
5 Tax Benefits of an Limited Liability Partnership
1. No Entity Level Tax on Trading Profits
As explained in Section 2, LLP profits are taxed once, on the individual members. There is no separate charge on the entity level.
A limited company, by contrast, faces two layers of tax. The company first pays corporation tax on its profits at rates between 19% and 25% (with marginal relief for profits between £50,000 and £250,000). If those after-tax profits are then extracted as dividends, the shareholders pay a further income tax charge on the dividend. In an LLP, there is no second layer.
2. Flexible Profit Sharing Between Members
An LLP offers much more flexibility in how profits are shared between members than a company structure. Members’ share of the profits is set out in the LLP agreement, not fixed by share capital. This makes it easier to reflect different levels of contribution, seniority or performance. The allocation can be changed from year to year without restructuring share capital.
From a tax perspective, this flexibility means that profit allocations can follow genuine commercial arrangements in a way that is more difficult to achieve in a company, where dividends must be paid in proportion to shareholding unless different share classes are created, which involves more formality and cost.
Note
In an LLP, profit allocations must reflect genuine commercial arrangements. HMRC’s mixed member rules can apply where profits are shifted to a corporate member to gain a tax advantage. The rules target cases where profits are diverted beyond a fair commercial return or where losses are allocated to individuals to access relief. Where the rules apply, HMRC can reallocate profit to individual members or restrict loss relief.
3. Potential National Insurance Savings
An LLP member is treated as self-employed for tax purposes rather than as an employee. As a result, the LLP does not operate PAYE on the member’s profit share and does not incur employer’s National Insurance on those amounts. Instead, the member accounts for income tax and Class 4 NIC through self-assessment.
By contrast, salary or other employment income paid to an employee or director of a limited company is subject to PAYE, employee’s Class 1 NIC and employer’s Class 1 NIC.
The difference is therefore not only the absence of employer’s NIC at the LLP level, but also that the individual member is subject to a different NIC regime from an employee. This can produce a meaningfully lower NIC cost and potential savings compared with an employment model.
The table below compares the NIC and related reporting obligations for a limited company and an LLP.
Charge
Limited Company (employee/director)
LLP (self-employed partner)
Employer NIC | 15% on earnings above £5,000 per year | N/A |
Employee NIC / Class 4 NIC | Class 1: 8% on earnings £12,570 to £50,270, then 2% above | Class 4: 6% on tax-adjusted trading profits £12,570 to £50,270, then 2% above |
Class 1A NIC on benefits in kind | 15% of the taxable value of benefits provided to employees | N/A |
P11D reporting | Required for reportable benefits | N/A |
Illustrative example: NIC on £100,000 of profits or salary (2025/26)
NIC Element
Company Employee
LLP Partner
Employer NIC (15% on earnings above £5,000)
Employee Class 1 NIC
Class 4 NIC
Class 1A NIC on benefits
Total NIC cost (excluding benefits)
£14,250.00
£4,010.60
N/A
Depends on benefits provided
£18,260.60
Nil
N/A
£3,256.60
Nil
£3,256.60
4. A More Straightforward Route to Admitting New Equity Participants
In a limited company, admitting a new shareholder involves issuing or transferring shares. That process requires a valuation of the shares, updates to the share register, filings at Companies House, and potentially stamp duty on the transfer. If shares are issued to an employee or director at less than market value, the discount may be taxed as employment income. The administrative and professional costs of these steps can be a real barrier, particularly for smaller businesses.
In an LLP, the position is more straightforward. Adding a new member involves amending the LLP agreement, which is a private document between the members. There is no share capital to adjust, no requirement to have the business valued for the purpose of the admission, and no stamp duty on the admission (unlike a share transfer in a company, which can trigger stamp duty at 0.5% of the consideration paid). However, where an LLP holds land or property, changes in members’ interests can give rise to an SDLT charge based on the proportion of the underlying property’s market value.
The new member then begins to participate in profits on the terms agreed by the partners. Adjusting profit shares or retiring existing members follows the same flexible process.
From a tax perspective, admitting a new LLP member does not create the same valuation and reporting issues that arise when shares change hands in a company. This makes it a more practical and cost-effective route to shared ownership.
5. Access to Partnership Loss Relief
This benefit is particularly relevant for professional services firms and early-stage businesses
Because an LLP is taxed as a partnership, an individual partner may be able to claim relief for their share of the LLP’s trading losses. This is a real advantage over a limited company, where losses stay with the company and do not reduce a shareholder’s personal tax bill.
The main routes for claiming relief are:
There are, however, some important restrictions on the amount of relief a member can claim against other income.
Capital contribution limit: Where an LLP carries on a trade, the amount of loss that a member can set against other income or chargeable gains is limited to the capital they have contributed to the LLP. For example, if a member has contributed £20,000 of capital, they can only claim up to £20,000 of sideways relief, even if their share of the loss is higher. Any excess can still be carried forward against future profits of the same trade.
Non-active member restriction: Members who spend less than 10 hours a week on average working in the trade are treated as non-active. Non-active members face an additional cap of £25,000 per year on sideways relief.
General income tax relief restriction: There is also a general cap that limits the total amount of certain income tax reliefs an individual can claim in any one year. The cap is the greater of £50,000 and 25% of the individual’s adjusted total income.
None of these restrictions applies to losses carried forward against future profits of the same trade. They only limit the ability to set losses against other sources of income or gains.
Important
The benefits described above assume the LLP member is a genuine self-employed partner. The salaried member rules, introduced in 2014, can treat an LLP member as an employee for income tax and NIC purposes if all three of the following conditions are met.
If all three conditions are met, the LLP must operate PAYE and pay employer NIC on that member’s remuneration, and several of the benefits described above will not be available.
To preserve self-employed treatment, a member needs to fail at least one condition. The analysis is fact-sensitive, and HMRC actively monitors compliance. Any LLP with a mix of senior and junior members should review whether these rules apply to each individual.
Conclusion
The Limited Liability Partnership (LLP) remains a strong option for many UK businesses. Tax transparency, flexible profit sharing, NIC savings, a simpler route to admitting new equity participants, and access to partnership loss relief can all deliver real financial advantages. This is particularly relevant for professional services firms and businesses where the partners intend to draw most of their profits.
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