Salaried member rules for LLPs explained

Before 2014, an LLP could give a junior professional a fixed profit share and treat them as self-employed, saving employer National Insurance on what was in substance a salary. The salaried member rules remove that where the member is not genuinely a partner in the business.

A member is taxed as an employee only if all three conditions are met. Failing any one of them keeps them self-employed.

Met where it is reasonable to expect that at least 80% of the member's total reward will be fixed, or variable without reference to the overall profit or loss of the LLP.

A genuine profit-linked element of more than 20%, that actually varies with the firm's results and could realistically be nil in a bad year, breaks this condition. A token percentage that always pays out does not.

Met where the member does not have significant influence over the affairs of the LLP as a whole. This is about the whole business, not their own department or client list.

In small LLPs, most members genuinely do influence the firm, so this condition often fails and the member stays self-employed. In large firms with management boards, it is usually met for junior members.

Met where the member's capital contribution is less than 25% of their expected disguised salary for the year. Contributing more than 25% is the clearest and most commonly used way out.

The contribution must be real capital genuinely at risk in the business, not a loan the LLP funds back to the member on circular terms. Contributions must also be revisited when reward levels rise, because the 25% test moves with the reward.

The LLP operates PAYE and Class 1 National Insurance on the member's reward and pays employer National Insurance at 15% above the £5,000 secondary threshold. That is a real cost the LLP had not budgeted for, plus interest and penalties if HMRC assesses it retrospectively.

The member is treated as an employee for tax but remains a member in law, which also affects expenses, pensions and benefits reporting.