HMRC has recently issued updated guidance on the salaried member rules for Limited Liability Partnerships (LLPs), focusing specifically on the interpretation of Conditions B and C. These rules are critical for determining whether an LLP member should be taxed as self-employed or treated as an employee for income tax and National Insurance purposes.
The latest clarification is particularly relevant for professional service firms, investment partnerships, and other LLPs where members may receive fixed remuneration or exercise informal influence. By tightening the definitions and addressing common concerns raised by tax advisers and businesses, HMRC aims to bring greater certainty to this complex area of partnership taxation.
This article breaks down the changes, explains the rationale behind them, and explores how they may impact UK businesses.
Background: The Salaried Member Rules Explained
Since 2014, HMRC has applied three tests—Conditions A, B and C—to determine whether a member of an LLP should be treated as a “salaried member” and taxed as an employee rather than as a partner.
Condition A looks at whether at least 80% of the individual’s income from the LLP is disguised salary (i.e. fixed or not linked to profits). Condition B considers whether the member lacks significant influence over the affairs of the LLP. Condition C asks whether the individual has contributed capital of at least 25% of their expected disguised salary.
If all three conditions are met, the individual is reclassified as an employee for tax purposes, triggering PAYE income tax and Class 1 National Insurance contributions.
Clarifications to Conditions B and C
The updated guidance primarily focuses on how Conditions B and C should be interpreted and applied.
Condition B – Influence Must Be Contractual
HMRC has clarified that a member’s influence must arise from formal, legally enforceable rights under the LLP agreement or applicable legislation. In other words, informal or de facto influence, such as being well-regarded or regularly consulted, will not be sufficient to fail this condition. LLPs must ensure that any claims of influence are backed by clear legal provisions. This puts the onus on LLPs to carefully draft and structure their internal agreements if they wish to rely on this condition.
Condition C – Capital Contributions Must Be Real and Enduring
Previously, there was uncertainty about whether capital contributions made to meet the 25% threshold would be viewed as avoidance behaviour and trigger anti-avoidance rules. HMRC has now made clear that where capital contributions are genuine—meaning they are at real financial risk and intended to be permanent—then they will not be challenged under the Targeted Anti-Avoidance Rule (TAAR). This is an important reassurance for LLPs looking to comply with the rules without fear of retrospective challenge, provided contributions are bona fide.
What Does This Mean for Me?
For UK LLPs, particularly in professional services, investment, legal, and consultancy sectors, these updates provide both clarity and new obligations.
The clarification to Condition B means LLPs can no longer rely on informal arrangements to argue that a member has “significant influence.” If members are to be excluded from salaried member treatment on this basis, their influence must be explicitly set out in the LLP agreement and backed by contractual terms.
On the other hand, the revised guidance on Condition C reduces uncertainty around capital contributions. LLPs can now confidently structure contributions to meet the 25% threshold without triggering anti-avoidance scrutiny—provided the funds are genuinely at risk and not returned via side agreements or temporary measures.
As a result, LLPs should take this opportunity to review their partnership structures, agreements, and capital accounts. Legal agreements may need to be amended to properly reflect members’ roles, powers, and financial commitments. Financial models and onboarding processes may also need to be updated to ensure that new members either meet the capital contribution test or fall outside salaried member classification on other grounds.
Final Thoughts
These clarifications mark a constructive step toward improved certainty in an area that has caused considerable compliance risk for LLPs. While they may require careful review and adjustment of internal documents and procedures, the updated rules allow firms to make informed decisions about member classification and reduce the risk of costly tax disputes with HMRC.
Taking proactive steps now will help ensure compliance and give LLPs greater control over how they structure roles, remuneration, and responsibilities for their members.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
