Wednesday, November 27, 2024
Labour's misdirected tax rises
The Guardian reports that well-paid City lawyers and other self-employed partners at businesses including top accountancy and private equity firms have been spared the increases to national insurance contributions announced in October’s budget, in a move that will deny the Treasury “billions” of pounds of potential revenue.
The paper says that members of limited liability partnerships (LLPs) were not included in Rachel Reeves’ changes to employer national insurance contributions (NICs), which were raised to 15% from April 2025, while the threshold at which contributions are due was also lowered to £5,000 from £9,100:
The measures, expected to ultimately raise £25bn a year, have drawn criticism from a string of large businesses, including retailers and hospitality firms, who say they will be forced to cut jobs and raise prices. Separately, thousands of farmers have protested against the changes to inheritance tax affecting agricultural and business properties.
Top partners at City law and professional services companies that operate as LLPs can take home salaries of £1m and upwards, but will not be affected by the increase in contributions.
Most members of LLPs are considered self-employed for national insurance purposes, and pay the lower class 4 rate of contributions. Currently, class 4 workers pay a 9% rate on profits between £9,568 and £50,270, with an additional 2% paid on profits above the upper limit.
Before the budget there had been speculation that LLP members would also have been affected by the changes, according to the Law Gazette, which is published by the Law Society, the professional body for solicitors in England and Wales.
It has also reported estimates that the Treasury could have raised £4bn from four of the five firms that make up the so-called ‘magic circle’ of City law firms that operate as LLPs, including A&O Shearman, Clifford Chance, Freshfields and Linklaters.
Tony Williams, principal at the legal consultancy Jomati, said he estimated that such a move could have raised “into the billions”.
Keir Starmer warned in August that the October budget would be “painful” given the state of the public finances. The prime minister, who worked as a lawyer for decades before becoming the director of public prosecutions, added that “those with the broadest shoulders should bear the heaviest burden”.
Historically, self-employed workers paid a lower rate of national insurance, on the basis that they did not receive benefits they would have been entitled to as employees, including holiday pay, sick pay, minimum wage and pension contributions.
Williams added that Reeves could have closed the apparent loophole by bringing in a higher threshold for the self-employed, either at the current upper limit of £50,270, or alternatively by adding a higher rate over £100,000.
“When you think about the number of firms in the City and others where people are earning significantly over £1m, it could be £2m or £3m,” said Williams.
He added that the government may not have looked at changing rates for partners at LLPs to avoid breaking its manifesto promise not to increase taxes on working people.
The self-employed also used to pay lower rates of national insurance, as they were previously not able to access benefits such as unemployment benefit.
“But that rationale doesn’t stack up very well in this environment,” Williams said.
None of this sounds like the sort of omission a Labour government should be making.
