Law firms across the UK may be facing a pivotal moment. With potential tax and National Insurance changes on the horizon in the Autumn Budget, many partnerships are reassessing whether their current structure remains the most efficient and risk-aware choice.
For managing and equity partners, these changes are not just about compliance, they are about strategic positioning and protecting the long-term financial health of the firm.
The Current Landscape for Law Firms
Most UK law firms operate as a Partnership or a Limited Liability Partnerships (LLPs) . This structure has historically offered flexibility and a degree of liability protection for partners, while enabling profits to be taxed through income rather than corporate taxation. Evolving tax obligations have prompted many firms to reconsider their operating structure.
Upcoming Tax and National Insurance Changes
The Autumn Budget is expected to introduce significant changes affecting partnerships, particularly around National Insurance contributions. For law firm partners, who often draw substantial profits, these changes could materially increase the overall tax burden. While the precise details are still emerging, the potential for higher National Insurance contributions, especially on profits allocated to partners, may tip the balance in favour of exploring incorporation.
In addition, changes to dividend taxation and income tax bands could further influence decision-making. Limited companies offer the ability to take advantage of dividend allowances, potentially resulting in a lower effective tax rate than income tax on partnership profits. These fiscal considerations are particularly relevant for law firms with high-earning partners seeking to optimise remuneration strategies.
Limited Companies: Benefits Beyond Tax Efficiency
Incorporation as a limited company offers law firms several strategic advantages.
- Limited Liability Protection
If a firm operates as a general partnership, it trades as an unlimited liability business, meaning the partners are personally responsible for all of the firm’s debts and financial obligations. While law firms typically have insurance in place to cover such risks, premiums are often higher for entities with unlimited liability.
Incorporation, on the other hand, provides the benefit of limited liability, protecting the personal assets of all equity partners.
- Potential Tax Efficiencies
One of the most compelling reasons for law firms to consider incorporation is the potential for lower overall tax liabilities. Through a limited company, profits can be distributed as dividends, which are generally taxed at a lower rate than income. For higher-earning partners, this can represent significant savings. When combined with the anticipated National Insurance changes, incorporation may offer a pathway to optimise personal remuneration while ensuring compliance with evolving tax regulations.
- Strategic Flexibility
Limited companies offer greater flexibility in structuring ownership, issuing shares, and planning succession. This can be particularly important for law firms with multiple equity partners, as it allows more nuanced management of profit allocation, shareholder rights, and exit planning.
Is Now the Right Time to Act?
Timing is crucial. While law firms can convert from an LLP to a limited company at any stage, doing so ahead of anticipated tax changes allows firms to plan effectively and take full advantage of potential efficiencies. Early adoption also provides the opportunity to structure remuneration, dividends, and risk management in a considered way, rather than reacting under pressure once changes are implemented.
Engaging with an accountancy partner experienced in law firm structures ensures that all regulatory, tax, and commercial considerations are addressed.
Managing Appetite for Risk
The move towards incorporation is not merely a tax exercise, it also reflects broader attitudes towards risk within law firms. Traditionally, many partners have been comfortable with the LLP model, relying on insurance to cover potential liabilities. However, rising premiums, increased regulatory scrutiny, and potential National Insurance hikes are prompting a re-evaluation. For firms willing to embrace structural change, incorporation offers a way to mitigate risk while potentially enhancing after-tax returns.
Conclusion
Law firms are facing a period of uncertainty but also opportunity. With potential National Insurance reforms and other tax changes on the horizon, the traditional LLP structure may no longer provide the optimal balance of flexibility, protection, and efficiency.
Incorporation as a limited company can offer law firms lower insurance costs, tax efficiencies, and greater strategic flexibility, all while maintaining compliance and protecting partners’ personal liability.
For managing and equity partners, now is the time to assess whether incorporation could strengthen the firm’s financial position and risk profile. Engaging specialist accountancy advice early ensures that any transition is managed smoothly, with the potential to deliver significant benefits for both the firm and its partners.
About Us
Williamson & Croft has extensive experience advising law firms on tax planning, incorporation, and risk management.
We provide tailored advice on tax planning, risk management, and company structuring specifically for law firms.
Contact us today to arrange a consultation and explore how your firm can benefit from the upcoming changes.