How are LLPs taxed in the UK?

An LLP carrying on a business with a view to profit is transparent for tax. It computes its profit, allocates it between members under the agreement, and each member is taxed on their share as if they had earned it directly.

Individual members pay income tax at 20%, 40% and 45% and Class 4 National Insurance at 6% between the lower and upper profits limits and 2% above, plus Class 2 where applicable. A corporate member pays corporation tax at 19% to 25% on its share instead.

Tax follows the profit allocation, not the money you took out. A member allocated £80,000 who drew £50,000 is taxed on £80,000. This is the single most common cause of an unaffordable January bill in a young LLP.

The fix is a reserving policy in the agreement: hold back a percentage of each member's allocation for tax before drawings are released.

Members are now taxed on profits arising in the tax year. An LLP with a year end other than 31 March or 5 April must apportion two accounting periods into each tax year, which means estimated figures and later amendments unless the year end is changed.

Transition profits arising from the reform are spread and need tracking through each member's returns.

The salaried member rules treat a member as an employee for tax where all three conditions apply: at least 80% disguised salary, no significant influence over the LLP's affairs, and capital contribution below 25% of expected disguised salary. The LLP then operates PAYE and pays employer National Insurance at 15%.

Mixed member rules counter profit being diverted to a corporate member to be taxed at corporation tax rates, reallocating the excess to the individual members where the arrangement lacks commercial substance.