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Rachel Reeves has ruled out making partners at law and accountancy firms pay more tax through national insurance contributions in the Budget, according to people briefed on preparations for the fiscal event.
The chancellor had been expected to announce a raid on limited liability partnerships (LLPs) that would generate about £2bn on November 26. But Reeves had ditched the plan after Treasury modelling suggested the policy could cost more than it raised because of tax avoidance, the people said.
The decision came as Reeves and Prime Minister Sir Keir Starmer scrapped a plan to raise income tax rates after an improved fiscal forecast from the Office for Budget Responsibility, with an expected fiscal hole of up to £30bn now closer to £20bn.
Most big law and accountancy firms in the UK operate as LLPs, which allows them to benefit from advantageous tax treatment despite securing high margins.
Adding national insurance to the tax bills of lawyers, accountants and other professionals who use LLPs would have affected 200,000 people and raised £1.9bn a year, according to the Centre for the Analysis of Taxation, a think-tank.
The move would have added almost 7 per cent to the tax rate for partners, bringing it to about 55 per cent, although Reeves was last week considering introducing a lower rate.
Lawyers, the Big Four accountancy groups and private equity executives had in recent weeks lobbied fiercely against adding NICs to partners’ tax bills.
In a string of meetings with ministers, firms and trade bodies said LLPs would be forced to restructure to general partnerships or incorporated companies, or even move more of their UK partners to overseas vehicles, in order to avoid the tax.
Firms had also argued the higher tax would be passed on in the form of higher fees charged to clients, noting that ministers had cast the professional services sector as key to boosting economic growth.
The Financial Times reported last week that ministers and officials were still debating the behavioural consequences of the measure, how much it would raise and whether the policy was worth introducing at all.
Reeves could still announce measures to increase the tax take from LLPs in the Budget, including by amending legislation to toughen requirements for a member of staff to be classified as a partner rather than an employee.
Meanwhile, the Treasury has also dropped plans for a new tax on wealthy Britons relocating to low-tax jurisdictions, including proposals for a 20 per cent levy on UK-based assets held by those leaving the country.
Critics had argued that a so-called exit tax could lead to an exodus of wealthy individuals before the policy took effect, and signal that the UK was not welcoming to them as a place to relocate or invest.
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