Rachel Reeves’s raid on doctors and lawyers is a stroke of genius

Whether you call it a loophole or a tax break, limited liability partnerships are long overdue for the attention of the chancellor, writes Chris Blackhurst

When stories break about the high salaries on offer these days, they often focus on solicitors and accountants. The items are not denied – in fact, the firms concerned boast of their brilliance and magnetism.

Those oh-so-marvellous lawyers and financial experts (many of whom specialise in dispensing tax advice, funnily enough) get off lightly from the UK’s tax regime. Their organisations are set up as limited liability partnerships or LLPs, which means they do not pay employers’ national insurance, and so their employees are charged NI at a lower rate.

Now, Rachel Reeves appears set to close this loophole at last. And loophole is not my word, it is how the trade bible, The Law Society Gazette, hailed Reeves’s reluctance to move against them last time round, with the headline: “Budget ’24: LLP members spared as national insurance ‘loophole’ remains”.

The autumn Budget looks set to impose a new regime on the more than 190,000 people who avail themselves of partnerships. They avoid the employer’s NI, as partners are classed as self-employed.

Heaviest users are the lawyers, accountants, GPs, doctors and architects. It’s not the juniors Reeves is really after but the high-earning partners. More than 13,000 partners reportedly earn an average of £1.25m a year. Mostly, they are lawyers, and many collect much higher sums. One estimate reckons that four of the five-strong Magic Circle, comprising the City’s biggest law firms, could together generate £4bn for the Inland Revenue.

Dan Neidle, head of the Tax Policy Associates think tank, used to work at one of those elite solicitors, as head of tax at Clifford Chance. He explained to the Gazette that a partner earning £2m currently takes home £1,072,000. If they had to find employers’ NI, that would fall to £934,000, meaning £138,000 more tax.

Their effective tax rate would increase from 46 per cent to 53 per cent, with their marginal rate becoming 54 per cent. “This puts them in the same position as (say) a trader at a bank where their salary and bonus pot together are £2m,” Neidle said.

‘Previously, the lawyers paid less tax than the traders. Rachel Reeves is thought to view this discrepancy as unfair, hence the change’ (AP)

Previously, the lawyers paid less tax than the traders. Reeves is thought to view this discrepancy as unfair, hence the change, which will fall under the category for her 2025 address of “those with the broadest shoulders” to pay their “fair share of tax”.

A crackdown on lawyers, accountants and other professionals who set themselves up as LLPs has been mooted for years and is also backed by think tanks. In what seemed to be authoritative briefings, the reform was heavily trailed ahead of last year’s Budget, but was then mysteriously dropped.

Not surprisingly, those in the crosshairs do not like it. One tax partner at a law firm told the FT, “This is a bad joke,” and added, “I believe more people will leave [the UK] if this measure is introduced. Then the tax will go down. Genius.”

Another described it as a wealth tax. It is that, all right. But not all wealth taxes are bad – perhaps unsurprisingly, there was little public pushback from making private schools subject to VAT. This falls into the same shrugging attitude of “most people could not care less, and if they thought about it at all, it makes them angry”, bracket.

A partner in a private wealth team told the FT that the chancellor’s move “has the feel of a chancellor picking an ‘easy’ target where she might expect public sympathy to be in limited supply”. Seemingly, he spoke without irony because he is right: it is an easy target and there will be limited public sympathy.

As for the claims they will leave, really? Not if their clients remain in the UK, they won’t.

They also say it will damage economic growth. Again, it is hard to see how, unless they mean by following their usual practice in adversity of raising their fees accordingly. No, this is one of the more sensible initiatives mooted for the Budget.

The Law Society Gazette has now dropped the term “loophole”, preferring “tax break”. However it is described, its closure is long overdue.