Does an LLP Pay Corporation Tax

When choosing a legal structure for your business, tax treatment plays a major role in the decision. Many business owners considering a Limited Liability Partnership, or LLP, ask whether it pays Corporation Tax like a limited company. While LLPs share some features with companies, the way they are taxed is very different.

In short, an LLP does not pay Corporation Tax. Instead, the profits of the LLP are taxed on the individual members. This makes it more like a traditional partnership from a tax perspective, even though it has its own legal identity and offers limited liability.

This article explains how LLPs are taxed, how profits are reported, and how this differs from other business structures in the UK.

How tax works for LLPs

Although an LLP must be registered with Companies House and file annual accounts, it is not a taxable entity in itself for Corporation Tax purposes. This means that HMRC does not assess the LLP directly. Instead, each member is taxed individually on their share of the business profits.

The LLP itself must still submit a partnership tax return to HMRC each year. This return shows the total income, expenses and profit of the business, along with how those profits are divided among the members. Each member then uses this information to complete their own Self Assessment tax return.

Members of an LLP pay Income Tax and National Insurance Contributions (NICs) based on their share of the profits. The amount they pay depends on their total personal income and which tax bands they fall into. There are no dividends or salaries in the same way as with limited companies, unless the LLP chooses to operate a PAYE scheme for salaried members or employees.

What about VAT and other taxes?

Although LLPs do not pay Corporation Tax, they may still be subject to other taxes. For example, if the LLP’s taxable turnover exceeds the VAT threshold, it must register for VAT and charge it on goods and services supplied.

If the LLP employs staff, including non-member employees, it must also operate a PAYE scheme and pay employer National Insurance. Similarly, if the LLP owns property, it may be liable for business rates and Stamp Duty Land Tax on purchases.

Some LLPs also make pension contributions, pay insurance premium tax or need to consider Construction Industry Scheme (CIS) obligations, depending on the sector they operate in.

How does this differ from a limited company?

The main tax difference between an LLP and a limited company is that a limited company pays Corporation Tax on its profits. The directors or shareholders then pay tax on money they draw from the company, whether through salary, dividends or other benefits. This creates two layers of tax: once at company level and again at individual level.

In contrast, an LLP has only one layer of tax. All profits are treated as if they flow directly to the members, who are taxed personally. This can be more straightforward in some cases, although it also means members must pay tax on profits even if those profits are not physically withdrawn from the business.

Is the LLP structure tax efficient?

LLPs can be tax efficient in the right circumstances. For example, professional firms that reinvest profits or do not need to retain significant earnings may prefer the simpler tax treatment of an LLP. Since members are taxed only once, there is no Corporation Tax and no dividend tax.

However, for businesses that plan to retain profits or build reserves, a limited company may provide more flexibility. Companies can control when and how profits are distributed, allowing for more tax planning options.

In some cases, hybrid structures are used. For example, a company might be a corporate member of an LLP, allowing some profits to be taxed at the Corporation Tax rate while others are taxed personally.

Final thoughts

An LLP does not pay Corporation Tax. Instead, each member is taxed personally on their share of the profits. While the LLP itself is responsible for filing a partnership tax return, the tax liability lies with the individual members.

This makes the LLP structure appealing to certain types of businesses, especially professional partnerships and service firms that want limited liability without the complexity of corporate tax rules. However, it is not the best choice for every business.

Before deciding on a structure, it is worth speaking to a qualified accountant or tax adviser who can help you assess the implications for your business and choose the most tax-efficient route.