Why Starmer chose to give rich lawyers a break in the Budget and punish everyone else

Many high earners in top legal and private equity firms in the City expected the government to close a loophole, which means despite earning seven-figure salaries, they pay one of the lowest rates of National Insurance. It could have raised billions for the Treasury, but it never came. Chris Blackhurst looks at why

While most major employers were gnashing their teeth at the increase in their national insurance in the Budget, one group was celebrating. Against expectations, limited liability partnerships (LLPs) were let off scot-free.

Many law, accountancy, architects and private equity firms structure themselves in this way. Their members are treated as self-employed for NI purposes and so they pay the lower Class 4 rate – despite often earning large salaries. It was thought that Rachel Reeves would put them on the same footing as normal companies and other organisations. However, this was not to be.

The chancellor will have been aware of the benefits of doing so. One piece of analysis suggests that the Inland Revenue loses £138,000 on every £1m of profit they make. From the “magic circle” of City law firms – Linklaters, Allen & Overy, Freshfields and Clifford Chance (excluding Slaughter and May, which follow the traditional partnership model) – that would amount to an extra £4bn a year. That’s £4bn from just four sets of lawyers. To put that in context, VAT on school fees is predicted to raise £1.7bn a year.

Private school parents, farmers and employers up and down the land were made to suffer. The aftershocks are still being felt. Despite Sir Keir Starmer and Reeves saying they didn’t want to pass on the pain to the normal working person, inevitably now some companies are saying they are having to cut back to meet the extra costs. Retailers are warning daily of inevitable job losses and increased prices because of the NI increase. Yet LLPs were excluded.

The solicitors’ journal, The Law Society Gazette, was in buoyant mood, leading its coverage with the headline: “Budget ’24: LLP members spared as national insurance ‘loophole’ remains”.

It’s surprising as this fortunate turn of events hadn’t been anticipated. In fact, quite the reverse. Back in June, the Financial Times reported: “Private equity and professional services firms face HMRC crackdown”. They were “grappling with the prospect of higher tax rates if a Labour government wins the general election”.

After Starmer’s victory, the mood appeared to harden. “HMRC plots crackdown on elite earners who could be hit with massive bills” was one headline. “HMRC is concerned that some people in the six-figure salary sectors are playing the system to minimise their tax and NI bills,” said the story.

That was slightly wrong. For six figures, read seven – many partners in the major London law firms, accountants and private equity houses are earning huge amounts. In what was clearly a briefing, we were told that “the tactic involves some of these high earners being described as self-employed or partners which allows them to reduce the tax and NI payable on their income. Their employers also benefit by reducing the NI they have to pay.”

New legislation was said to be coming which “concerns whether senior partners at limited liability partnerships should be deemed employed or self-employed for tax purposes”. The move would follow attempts to tackle “disguised employment”, which has seen HMRC pursue TV and radio presenters for income tax and NI as far as the courts.

Come the Budget, however, there was neither sight nor sound, despite a closure of the loophole bringing in a predicted payday to the Treasury worth more than the amount raised from the new VAT being put on private schools.

It may not have gone away, particularly as the squeeze on public finances continues.

Peter Noyce, a partner specialising in the legal sector at accountancy firm Menzies, said he would not be surprised if HMRC began examining “salaried member” structures more closely.

That said, there was palpable relief in the City and beyond that, for now, their leading lights had been spared. Exactly why is a puzzle.

Again, some background. This is a Labour administration that has made it a manifesto pledge to drive against tax avoidance. The party has promised to collect an extra £4.7bn a year by pursuing tax errors and evasion. Here, on a plate, was £4bn from four City law firms alone, not to mention the rest – and Starmer and Reeves chose to ignore it.

To say it does not make sense is an understatement. Those affected tick the ideological boxes that Labour has in its sights. As far as the left is concerned, they’re wealthy, same as the school fee-payers, farmers and non-doms; they’re not traditional Labour supporters. They can also afford it: professional services is one hugely profitable area of the British economy; by and large its practitioners have enjoyed a sustained boom; the NI change would be easily absorbed.

Instead, though, Labour has chosen to strike at sectors which have low profit margins, pay minimum wages and deal directly with consumers – and, in the case of the high street, are reeling from online shopping and soaring costs brought about by high business rates, rents and red tape.

So why did Starmer and Reeves choose to let LLPs off the hook?

It may be that they will revisit them, and it was too complex to make a move now. That, however, makes little sense: HMRC has been looking at reform for a while and it could be relatively easily enacted.

Another reason is that they spent a lot of time in the run-up to the election persuading the City that their incarnation of Labour was business-friendly. The City is also one of the economy’s true success stories and central to that is professional services. The world flocks to the UK’s leading law firms and accountants for advice. They risked upsetting their hard-won reputation and the City’s hegemony.

The cynical, though, suggest there could be an even simpler explanation. As a lawyer, Starmer might not have been able to face the wrath of his peers and possibly, his North London neighbours. Blows from farmers, school parents and non-doms can be taken on the chin, but those from the likes of Linklaters and Freshfields are of a different order.

Whatever, LLPs have escaped. It’s bizarre, and given the pain dished out to others and the dismal economic backdrop, it is shaming.