The much anticipated Autumn Budget 2024, delivered by the UK’s first female Chancellor, Rachel Reeves MP, brings significant changes that will impact professional services businesses across the UK. Here are the key highlights relevant to your firm and its partners:
- Increased Employers’ National Insurance Contributions (NICs): The planned increase in NICs by 1.2% to 15%, combined with a lowered threshold, will elevate payroll costs for firms. This increase will add additional pressure to firm finances on top of inflation, as well as cash flow issues that firms may be facing as a result of basis period reform. The increase will have a disproportionate effect on professional services firms, given that payroll costs typically represent a high proportion of overall expenses. This change will likely strain margins, particularly for those employing a large workforce.
- Impact on Partnership Structures: For firms structured as partnerships and limited liability partnerships (LLPs), the increase in employer NICs will primarily affect employee costs rather than partner remuneration, as partners and LLP members (subject to meeting the “salaried member” rules) are typically treated as self-employed. Conversely, companies where partners or directors are paid salaries will face direct financial impacts from increased employer NICs. Many firms may reconsider admitting their salaried members into their partnership or LLPs to achieve significant savings on employer NICs. However, it is important to note that tax changes should not be the sole driver for this decision. Firms must also consider other strategic aspects, such as their overall partnership structure, succession planning, capital contributions required of partners, career paths and progression, as well as the overall impact on governance and partner remuneration. Aligning the incentives and strategic goals of newly admitted partners with the partnership as a whole is essential for fostering cohesion and long-term success.
- Tax Arbitrage Shift: The adjustment in employer NICs has favourably shifted the tax arbitrage between LLPs and partnerships versus companies, making the former structures more financially advantageous. Nonetheless, companies still enjoy a crucial tax benefit in that profits can be retained in a much more tax-efficient manner, which can be especially useful for firms looking to retain profits for strategic future investments. Additionally, a corporate structure may be more suitable and efficient for firms seeking external investment or anticipating a future capital event. Any decisions related to structural changes should therefore be carefully evaluated, considering not just tax implications but also how these changes align with the firm’s overarching strategic objectives and values.
- Abolition of the Non-Dom Tax Regime: The current non-dom tax regime will be abolished and replaced by a residence-based system. However, the government has not elaborated on what the new system will entail, which introduces a degree of uncertainty until further clarification is provided. This change will add complexity to the tax situations for partners of international firms who are based in the UK, affecting those who previously benefited from non-dom status and introducing new financial considerations which firms will need to take account of when seconding overseas partners to their UK offices.
- Increased Capital Gains Tax (CGT): The rise in CGT rates will impact high-net-worth individuals and partners, contributing to a more challenging tax environment.
- Changes to Tax Rules on Liquidations of Limited Liability Partnerships: The government announced changes to how capital gains are taxed when an LLP is liquidated and assets are disposed of to a contributing member or person connected to them. This measure aims to close a route used for tax avoidance. These changes will come into effect from 30 October 2024 and will be legislated for through the Finance Bill 2024-25.
- Corporate Tax Roadmap: A notable highlight of the Budget is the announcement of a Corporate Tax roadmap, which (amongst other things) caps the corporation tax rate at 25% for the duration of this Parliament. This development provides a measure of financial stability amid rising costs and evolving tax regulations.
As professional services firms navigate these changes, it is essential to stay informed and adapt financial strategies accordingly. The Autumn Budget 2024 brings both challenges and opportunities for businesses, and we recommend assessing how these developments affect your operations and partnership dynamics.
While we do not advise on tax matters, we are well-versed in changes to partnership structures, remuneration, and governance that may be necessitated by some of the issues firms may face as a result of the changes made by the Autumn Budget 2024.
If you have any questions or need assistance in understanding how these changes may impact your firm, please do not hesitate to contact Partner Zulon Begum.
