The aim of the model is to leave each individual in the same net position as if they had not joined the LLP, but to leave the business as a whole in a more robust one. This is achieved primarily through the change in attitude of the team becoming partners, but also through some permanent and cash flow savings detailed below.
In the 2019/20 tax year, any income earned through PAYE over £12,500 is subject to income tax at 20% which is the same for any LLP profits taxed through self-assessment in 2019/20.
In the 2019/20 tax year, any income earned through PAYE over £8,632 and under £50,000 is subject to Class 1 National Insurance at 12%; income over £50,000 is subject to Class 1 National Insurance at 2%. All PAYE income over £8,632 is also subject to Employers National Insurance at 13.8%.
In the 2019/20 tax year, LLP Profits over £8,632 and under £50,000 are subject to Class 4 National Insurance at 9% (3% less than under PAYE); LLP profits over £50,000 are subject Class 4 National Insurance at 2%. On LLP profits there is no equivalent of Employers National Insurance. However, LLP members do pay Class 2 National Insurance which is calculated at £3 per week that the member is part of the LLP. On a £30,000 annual gross salary the difference in annual tax paid is over £3,400.
Cash flow benefits
Due to the different tax rules, the LLP model allows a business some cash flow benefits.
Income tax and National Insurance
Unlike PAYE, which is payable on a monthly basis, income tax and national insurance on LLP profits is payable every 6 months (on or before 31 January and 31 July).
The LLP will be registered for VAT with a different quarter end to the Ltd company. This allows the business to spread their VAT payments over 8 quarters rather than 4 quarters negating the need for such lumpy payments, but still paying the same amount of VAT. Additionally, due to the timing of the invoices between the two entities, a natural deferral is created. This is usually equal to one quarters VAT or 5% of annualised turnover. It is important to understand that this is only a deferral and will become payable upon the closing of the Ltd or LLP, not all clients take advantage of this cash flow benefit but most find it a useful to know it is there should the business ever need it.
billings – time vs value add
Professional firms traditionally bill on a time basis, regardless of the time taken to perform a task or whether said task has been of benefit to the client in question. We think this is unfair for a small business as they have no control of the costs and may receive no benefit. Therefore, we do not bill on a time basis, instead we bill on a value-added basis and will only ever invoice clients based upon a proportion of the value which we have added regardless of how long it has taken to complete that task. We spread our implementation and support costs over the life cycle of the partnership model.
This enables us to provide a highly affordable service; our costs are not actually costs to the business as they are paid for many times over by the direct financial benefits gained by the business. And this is the case from day one onwards – there is no upfront cost.