Do LLPs Pay Corporation Tax in the UK? Get Explanation Here

When starting a business in the UK, people often ask, “Do LLPs pay corporation tax?” It is a common query in the wake of corporation tax rising and entrepreneurs wanting the most tax-efficient structures.

An LLP is a combination of the flexibility of a partnership with limited liability protection commonly associated with companies. However, how an LLP is taxed is very different from a limited company.

This blog will tell you who doesn’t need to pay corporation tax and describe in full exactly who will pay the 25% Corporation Tax so that you can make plans for your business’s financial future with confidence.

Do LLPs Pay Corporation Tax?

No, is the short answer. Unlike limited companies, LLPs don’t pay corporation tax. An LLP is treated for tax purposes as a transparent entity.

UK law, specifically the Income Tax (Trading and Other Income) Act 2005, taxes an LLP as a general partnership for tax purposes if operated with the intention to make a profit. This is the principle of tax transparency.

This also answers another related question ‘Do you pay corporation tax on a partnership? No, you don’t pay corporation tax on a general or limited liability partnership’s profits. The partners pay Income Tax.

The profits are distributed between the members (partners), and each member pays tax on their share of profit under self-assessment.

While the LLP itself does not pay Corporation Tax, it is still obligated to file a partnership tax return (SA800) to HMRC annually. This return contains the LLP’s income and expenditure, but more significantly, how the profit has been shared out among the members.

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What Are the Tax Benefits of an LLP?

One of the key reasons business owners choose an LLP is the tax benefits. Let’s go over them in some detail:

• No double taxation: Unlike a limited company, where profits can be taxed at both the corporate and personal level, an LLP’s profits are taxed only once at the individual member level.
• Flexible profit sharing: Members can agree on how to divide profits, rather than being bound by a fixed shareholding percentage.
• Tax relief: Members can claim tax relief on interest for loans used to purchase a share in the partnership.
• Business Asset Disposal Relief (BADR): Members may qualify for a reduced Capital Gains Tax rate when selling their interest.
• International advantages: Non-resident LLP members can avoid UK tax on non-UK-sourced profits.

In short, the tax benefits of an LLP offer simplicity and flexibility that will appeal to many small businesses and professional practices (for example, law firms, accountants, and consultants).

The Tax Advantages of an LLP

The fact that an LLP pays no Corporation Tax is one of its strongest points, giving worthwhile tax advantages of an LLP over a limited company, particularly in relation to profit extraction.

Avoiding Double Taxation

1. Limited company tax: The company pays Corporation Tax (up to 25% for profits over £250,000). Shareholders then pay Dividend Tax on the dividends they receive (up to 39.35% for additional rate taxpayers).
2. LLP tax: Profits are taxed only once, at the individual member’s Income Tax rate. For some higher earners, this can be a more efficient way to extract profits.

Greater Flexibility And Convenience

1. 1. Flexible profit sharing: Profit-sharing arrangements are governed by the LLP agreement and can be flexible, allowing for annual adjustments without the formalities of issuing shares or passing board resolutions.
   2. Simplified administration: There is no need for the LLP to manage the complexities of Corporation Tax and dividend distribution tax rules.

Making Use Of Personal Tax Allowances

Since profits are allocated directly to the members, they can offset their share against personal tax allowances and reliefs to reduce their overall tax bill. This ability is not available at the company level.

Do You Pay Corporation Tax on a Partnership?

Briefly, the straightforward answer is no. You do not have to pay corporation tax on a partnership. This applies to the conventional partnerships and LLPs.

Here’s how it works:

• The partnership itself is not taxable.
• Each partner does, however, pay Income Tax on his/her share of the profit.
• Partners also pay National Insurance Contributions.

So, if you’re in a partnership or an LLP, corporation tax won’t pinch you. Instead, your personal rate of income tax will apply, 20% to 45% depending on how much you earn.

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Who Will Pay the 25% Corporation Tax?

The UK government announced that from April 2023, corporation tax would increase to 25% for companies making over £250,000 in profits.

Here’s who will pay:

• Large Limited Companies, those making over £250,000 in profits.
• Those with Associated Businesses, profits are allocated across associated businesses, so more companies will likely be pushed into the higher rate.
• Medium-sized companies, those making £50,000 to £250,000, pay a tapered rate (between 19% and 25%).
• It’s worth noting that LLPs won’t pay the 25% corporation tax, as LLPs are taxed under the personal tax return of their members. This is one of the main reasons why some business owners prefer LLPs over limited companies.

Who Is Exempt from Paying Corporation Tax?

Corporation tax only applies to limited companies and certain other corporate bodies. As such, the following are generally exempt:

• Partnerships and LLPs, as discussed, don’t pay corporation tax directly.
• Sole Traders or sole proprietors are taxed under self-assessment, not corporation tax.
• Some Charities and Not-for-Profit Organisations, if registered and compliant with HMRC exemptions, may avoid corporation tax on charitable activities.

How Do I Avoid 25% Corporation Tax?

Since LLPs are not subject to corporation tax, one way of avoiding the 25% rate for company profits is by joining or forming an LLP. For companies that are already in limited company form, other ways of legally reducing or avoiding payment of the increased rate include:

• Claim All Available Expenses, and make sure your company claims all allowances to reduce taxable profit.
• Make Pension Contributions, employer pension contributions reduce profit before tax.
• Pay Tax-Efficiently, A balance of salary and dividends can reduce tax exposure.
• R&D Tax Credits, where relevant, companies can claim tax relief for research and development.
• Business Restructuring, some owners restructure from a limited company to a partnership or LLP to avoid the 25% corporation tax.

However, you should always seek professional tax guidance before restructuring and avoiding taxes.

The Bottom Line

So, do LLPs pay corporation tax? The answer is that LLPs do not pay corporation tax. Members just pay income tax and National Insurance on their share of profit. The tax benefits of an LLP, i.e., the ability to share profits flexibly, the exclusion from corporation tax of 25%, and offsetting against expenditure, make LLPs an attractive option, particularly for professional partnerships.

But whether you should have an LLP or a limited company depends on your business structure, growth plans, and the level of income you have. If you are unsure, always consult a competent accountant or tax professional before making your decision.

Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.