This document explains some of the key differences in the way you are paid once you join the Limited Liability Partnership (LLP) and demonstrates what you can expect to see on your payslips and tax returns. Bear in mind, although the wording is a little different, what you actually receive won’t change unless you’ve knowingly negotiated a different agreement with your employer upon becoming a partner. First, we’ll take you through a traditional payslip so it’s easier to ascertain the difference and see how the two relate to one another…
As a PAYE employee, most will be familiar with the concept of a gross salary – whereby monthly deductions for tax and National Insurance Contributions (NICs) are taken before calculating net pay.
See below for an example of a limited company payslip (for comparison):
Under the LLP structure, you are paid a net monthly drawing rather than a gross salary which does not require deductions for tax and National Insurance (NI). It is important, however, to be aware that these net drawings are calculated on a PAYE basis, ensuring that your monthly take home pay (net pay) remains the same.
As such, tax and NI deductions shown on your LLP payslips are not actual amounts that have been taken or indeed paid to HMRC. The reason for including them on the payslip is simply to demonstrate that your net pay remains the same and is calculated in the same way as it would have been if you had remained being remunerated through PAYE. These deductions are often referred to as ‘hypothetical’.
Please also note that pension deductions are not affected by your LLP membership.
See below for an example of an LLP payslip with annotations:
Self-assessment tax return
As mentioned above, net drawings are not considered taxable income (hence no tax or NI deductions); instead LLP members pay tax and NI annually on their share of the trading profits which have been declared in the LLP accounts. Therefore, this is the figure that will be declared on your tax return and as such will not match any of the figures on your payslips as you might normally expect.
The LLP Members’ Agreement (or Partnership Agreement) confirms that any tax liabilities and NI payments that are due on your personal tax return because of partnership profits are payable by the LLP and not you personally.
Example Tax Calculation (SA302), demonstrating where income may be displayed: