You made someone a fixed-share partner, and for tax they may still be an employee. The salaried members rules treat an LLP member as employed if three conditions are all met — which means PAYE, and 15% employer National Insurance the firm did not budget for. Fail any one condition and the member stays self-employed.
Guide · Updated August 2026
Sections 863A to 863G of ITTOIA 2005, inserted by the Finance Act 2014 and in force from 6 April 2014 (18 July 2014 for the remaining purposes), stop an LLP being used to give someone the tax treatment of a partner while the substance of their arrangement is employment. If all three conditions are met at the relevant time, the member is treated for income tax purposes as an employee of the LLP under a contract of service. That brings PAYE on their remuneration and secondary Class 1 National Insurance at 15% for the firm.
The rules are cumulative, which is the single most useful thing to know about them: the member is only caught if A and B and C are all satisfied. Fail any one and the member remains self-employed and is taxed on a profit share as before.
Condition A is met if, at the relevant time, it is reasonable to expect that at least 80% of the total amount payable by the LLP for the member's services, in their capacity as a member, will be disguised salary.
An amount is disguised salary if it is fixed, or if it is variable but not by reference to the LLP's overall profits or losses, or if in practice it is not affected by them. Note the last limb. A profit share that is technically variable, but which has been paid at the same figure through good years and bad, is disguised salary in substance. The test is what it is reasonable to expect, not what was eventually paid.
This is the condition that catches the classic fixed-share partner: a guaranteed drawing, a token points allocation, and a bonus that in practice tracks personal billing rather than firm profitability.
Condition B is met if the mutual rights and duties of the members, and of the LLP and its members, do not give the member significant influence over the affairs of the partnership.
The reference point is the affairs of the partnership as a whole — not influence over a team, a department or a client relationship. Running the largest practice group in the firm is not, by itself, significant influence over the firm. Membership of a management board that genuinely decides strategy, admissions, remuneration and capital may be. What matters is the mutual rights and duties as they actually operate, so a members' agreement that reserves every real decision to the equity partners will point one way whatever the title on the business card says.
Condition C is met if the member's capital contribution to the LLP is less than 25% of the disguised salary reasonably expected for the relevant tax year.
This is the only condition with a number attached, and it is the one most often in play. It is tested at 6 April each year, or on joining for a new member, and again whenever the contribution changes or the member's circumstances change in a way that affects the expected disguised salary. A member who clears the test in April and takes a pay rise in October may fail it by the following April.
Worked example — illustrative. A fixed-share member is expected to receive £90,000 for the tax year, all of it disguised salary. The 25% threshold is £22,500. A capital contribution of £15,000 is below that, so Condition C is met, and if A and B are also met the member is a salaried member. A contribution of £25,000 would exceed the threshold, Condition C would fail, and the member would remain self-employed for tax.
Capital contribution is the lever firms reach for, and it needs saying plainly what that means. A genuine contribution is money at risk in the business. An arrangement engineered purely to clear the 25% line — particularly one funded by a loan the member is not really exposed to, or one that comes with an undertaking to return the money — is exactly the territory HMRC's Spotlight 66 addresses, which targets LLP arrangements used to disguise employment income. This guide describes the test; it does not describe planning, and you should be cautious of anyone who offers to sell you some.
Worked example — illustrative, 2026/27 rates. Take the same member on £90,000.
So one salaried member on £90,000 adds roughly £13,500 of combined annual cost. Across four such members that is £54,000 a year, and if the position has been wrong for several years there is exposure for earlier periods too. Getting the answer right prospectively is far cheaper than arguing about it retrospectively.
A salaried member goes on the payroll and is reported through RTI like any other employee, with the firm operating PAYE and accounting for both primary and secondary Class 1 National Insurance on their remuneration. Pension auto-enrolment duties need checking for that individual. The member remains a member of the LLP for company law and regulatory purposes — the rules change the income tax treatment, not the constitution of the firm — so the accounting for their remuneration and the firm's own tax computation both need to reflect the split. Our law firm payroll page covers how we run that alongside the rest of the firm's payroll, and LLPs and partnerships explains how the member allocation is handled at the year end.
One final scoping point that saves confusion: these rules apply to members of an LLP only. They do not apply to partners in a traditional partnership, and they do not apply to a limited company, where the question is simply whether someone is an employee or a director in the ordinary way. If you are weighing a change of structure, the LLP vs limited company guide sets out the rest of the trade-off, and a restructure is exactly the moment to re-run these three conditions for every member.
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They are sections 863A to 863G of ITTOIA 2005, inserted by the Finance Act 2014 and in force from 6 April 2014, with 18 July 2014 for the remaining purposes. They treat a member of an LLP as an employee for income tax purposes, under a contract of service, where three conditions are all met. That means the firm operates PAYE on the member's remuneration and pays secondary Class 1 National Insurance at 15%. The conditions are cumulative: the member is only caught if Condition A on disguised salary, Condition B on significant influence and Condition C on capital contribution are all satisfied at the relevant time. Fail any one and the member remains self-employed.
Not automatically. A fixed-share member is caught only if all three conditions are met. Condition A asks whether it is reasonable to expect that at least 80% of what the LLP pays for their services will be disguised salary — meaning fixed, or variable without reference to the LLP's overall profits, or in practice unaffected by them. Condition B asks whether the mutual rights and duties give the member significant influence over the affairs of the partnership as a whole. Condition C asks whether their capital contribution is less than 25% of the expected disguised salary. Many fixed-share partners meet A and B, so C often decides the answer.
Condition C is met, pushing the member towards salaried treatment, where the capital contribution is less than 25% of the disguised salary reasonably expected for the relevant tax year. On an illustrative expected figure of £90,000 that threshold is £22,500: a contribution of £15,000 leaves Condition C met, while £25,000 would cause it to fail and the member would stay self-employed. The test is applied at 6 April, or on joining, and again whenever the contribution or the expected remuneration changes. The contribution has to be genuine capital at risk in the business — HMRC's Spotlight 66 addresses arrangements used to disguise employment income.
The visible cost is employer National Insurance at 15% on pay above the £5,000 secondary threshold. On an illustrative member receiving £90,000 that is 15% of £85,000, or £12,750 a year, which the firm does not bear at all if the member is genuinely self-employed. The member's own National Insurance also rises, from £3,057 of Class 4 to about £3,811 of primary Class 1, a difference of roughly £754. Income tax is broadly similar in amount but is collected monthly through PAYE rather than through self assessment. In total, around £13,500 a year for one member on that level of remuneration.
Test at 6 April each year, on joining for any new member, and again whenever something changes: a pay rise, a change to the profit-sharing formula, a capital repayment, a move on or off the management board, or an amendment to the members' agreement. Test every member who is not full equity, including fixed-share, salaried and junior equity members and anyone on a guaranteed minimum. Keep a short written file note for each one recording the expected remuneration, how much of it is disguised salary, the capital contribution against the 25% threshold, and the basis for the influence assessment. That note is the whole defence if HMRC asks later.
No. Sections 863A to 863G apply to members of a limited liability partnership only. Partners in a traditional partnership are outside them entirely, and so is a limited company, where the question is simply whether an individual is an employee or a director in the ordinary way. That scoping point matters when a firm is considering a change of structure, because converting an LLP into a company removes these rules and replaces them with a different set of questions about salary, dividends and employment status. Any restructure is also the right moment to re-run all three conditions for every remaining member of the LLP.
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