Lawyers, GPs and accountants will reportedly face higher taxes as Rachel Reeves looks to top up the Treasury’s coffers by targeting the wealthy.
In her Budget next month, Ms Reeves is expected to announce a charge on workers who use limited liability partnerships (LLP), raising £2bn as she tries to fill a hole in the public finances estimated at between £30bn and £50bn.
The UK has 355,760 partnerships, with 86,030 of them having employees, according to Money.co.uk. They are particularly common in the legal world. Partnerships do not pay employer’s national insurance of 15 per cent because partners are treated as self-employed. Partners also pay a lower rate of employee NI.
But Ms Reeves is preparing to announce changes to the system in her Budget, as reported by The Times.
She will impose a new charge on partnerships in an effort to “equalise the tax treatment”. But the charge is expected to be levied at a slightly lower rate than the employers’ rate of national insurance.
The Centre for the Analysis of Taxation (CenTax) found that solicitors receive a fifth of all partnership income, averaging £316,000 each in company profits a year. For GPs, the average is £118,000 and for accountants £246,000.
It’s thought more than 13,000 partners earn an average of £1.25m a year.
Ms Reeves is also expected to announce a “mansion tax”, imposing capital gains tax on the sale of the most expensive homes.
She said on Tuesday, as she sought to pave the way for tax rises, that Brexit and austerity had had a bigger effect on the public finances than expected.
The Office for Budget Responsibility (OBR) next month is expected to downgrade Britain’s growth forecasts and economists believe it is increasingly likely that the chancellor will break her manifesto pledge not to increase income tax, VAT or national insurance to balance the books.
Ms Reeves said: “We know the OBR – I think are going to be pretty frank about this – [will say] that things like austerity, the cuts to capital spending and Brexit have had a bigger impact on our economy than was even projected back then.
“That is why we are unashamedly rebuilding our relations with the EU to reduce some of those costs that in my view were needlessly added to businesses since 2016 and since we formally left a few years ago.”
Arun Advani, the director of CenTax, told The Times there was no reason why partners should pay less tax than similarly highly paid employees and business owners.
“Since partnership income is hugely concentrated, with almost half going to those in the top 0.1 per cent, exempting partners from any equivalent to employer NICs is very regressive and simply means higher taxes for everyone else,” he said.
The absence of employer national insurance had arisen from a sequence of small accidents, he said.
Stuart Adam, a senior economist at the Institute for Fiscal Studies, said: “People in LLPs are generally very well off and in many cases are just supplying their labour like ordinary employees are, so it’s not clear why they should get preferential treatment.
“But as with any tax rise, it can provide a disincentive to work. There may be other ways that people might respond, including in the most extreme cases leaving the UK or not coming in the first place.”
The Treasury has been contacted for comment.
