Salaried member rules for LLP members

Q: How do the three tests work together in practice?

Illustration only. Dan becomes a member of an LLP at the start of the tax year. His expected reward is a fixed £90,000, a bonus of up to £15,000 based on his own billings, and a share of the firm's overall profit expected to be £10,000, a total of £115,000. The fixed sum and the personal bonus are disguised salary: £105,000, or 91% of the total, so Condition A is met. He sits on no management body and has no say in strategy, so Condition B is met. For Condition C, 25% of £105,000 is £26,250. With capital of £20,000, Condition C is met and Dan is a salaried member taxed through PAYE. If he instead contributes £30,000 on joining, funded by a full recourse bank loan he services himself and with no right to withdraw it while a member, Condition C is not met and he is taxed as a self employed member.

An individual member of a UK LLP is taxed as an employee of the LLP, not as a self employed partner, if three conditions are all met: at least 80% of their expected reward for services is “disguised salary” (Condition A), they have no significant influence over the LLP as a whole (Condition B), and their capital contribution is less than 25% of their expected disguised salary for the tax year (Condition C). Failing any one condition takes the member outside the rules, but arrangements designed to fail a condition are ignored.

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Who can the salaried member rules apply to?

Sections 863A to 863G of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) were added by the Finance Act 2014 and apply from 6 April 2014. They cover only LLPs formed under the Limited Liability Partnerships Act 2000; general partnerships, limited partnerships and overseas entities similar to LLPs are outside them (PM251000). They also apply only to individuals who perform services for the LLP as members, so they do not catch corporate members, members who only invest money, or retired members still receiving a profit share for past work (PM253000).

HMRC applies the three statutory tests and nothing else. Employment style features such as sick pay, holiday entitlement or notice periods in the members’ agreement are not taken into account (PM254000). This page looks at how each test works in practice; for the wider legal and tax framework of LLPs see limited liability partnerships (LLPs) explained.

What counts as disguised salary under Condition A?

Under section 863B, an amount is disguised salary if it is fixed, if it varies without reference to the overall profits or losses of the LLP, or if it is not in practice affected by them. Condition A is met if it is reasonable to expect that at least 80% of the total payable for the member’s services over the “relevant period” will be disguised salary.

HMRC’s guidance draws the lines like this:

Pay that varies with personal performance, or with the profits of one division rather than the whole firm, is disguised salary (PM255100).
A guaranteed minimum that the member will receive even if the LLP makes a loss is disguised salary, whatever it is called (PM255650).
Drawings on account of a genuine profit share, which have to be squared up against actual profits, are not disguised salary (PM255100).
A share of the whole firm’s profits, including unit based systems where the unit value depends on overall profit, is not disguised salary. HMRC’s “slicing the cake” analogy at PM255680 asks whether the member gets a slice of a cake whose size depends on the firm’s results.

The test looks forward. It is applied when the member joins (or was applied at 6 April 2014), whenever the remuneration arrangements are put in place or changed, and when the period over which the arrangements were expected to run ends (section 863B(1)). An unexpected profit forecast that does not alter the arrangements does not trigger a retest (PM255400). HMRC looks for the most realistic outcome (PM255500).

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What is significant influence under Condition B?

Condition B (section 863C) is met if the members’ mutual rights and duties do not give the individual significant influence over the affairs of the LLP. HMRC starts from the LLP agreement, including any personal terms, but looks at what happens in practice (PM256100). Its examples of decisions that may indicate significant influence (PM256300) include admitting new members, deciding where and in what areas the firm does business, strategy, acquisitions and disposals, major financial commitments, the business plan and appointing key staff. Merely having a vote or voicing a view is unlikely to be enough, and administrative roles such as invoicing, HR for non key staff, tax returns or premises management do not count.

Two points often decide cases. First, influence must be over the LLP as a whole; a member who runs one division or branch but has no say over the whole business can still be a salaried member (PM256800). Second, size is relevant: in a small firm where every member attends and speaks at monthly meetings that take the major decisions, all members may fail Condition B, but in a larger firm key decisions are usually delegated to a board (PM256500).

How does the 25% capital test under Condition C work?

Section 863D compares the member’s contribution to the LLP with 25% of the disguised salary expected for the tax year. The test is applied when the member joins and at the start of every tax year, and again whenever the contribution or other relevant circumstances change. Contribution here means capital actually put in under the LLP agreement as a permanent endowment of the firm (PM258200). It does not include:

current account balances or undrawn profits, unless the members have agreed to convert them into capital;
amounts the member is, or may be, entitled to withdraw while still a member, for example under a sliding scale that refunds capital;
amounts the member can require someone else to reimburse, or that are covered by insurance or an indemnity;
sums the member may be called on to pay in the future.

Two timing rules prevent simple workarounds. If a member joins part way through the year, or is expected to leave before 5 April, the contribution is scaled down by the days they are not a member before the comparison is made (section 863D(8) to (10); PM258400). And if a member who meets Condition C increases their capital mid year, the increase is ignored unless it is expected to last for the rest of the year, and the new figure is scaled down by the days before the increase (section 863D(6), (7) and (11); PM258520).

How does the anti avoidance rule apply to capital top ups?

Section 863G(1) says that, in deciding whether someone is a salaried member, no regard is had to arrangements with a main purpose of securing that the rules do not apply. HMRC accepts that a genuine and long term restructuring, such as promotion to a management board with real influence, is not caught (PM259200). Borrowing to fund capital is acceptable where the loan is full recourse and the member bears its cost and risk, even if the LLP arranges it (PM259310). Limited recourse loans, and loans from the LLP or connected parties, are likely to trigger the rule (PM258100).

HMRC added guidance in February 2024, revised in April 2025, on members who top up capital each year to stay just above 25% of their expected disguised salary. Its example at PM259200 says it is a question of fact whether the original or further contributions were made under arrangements with a main purpose of avoiding the rules, judged against the policy that people whose terms are like employees’ should be taxed as employees. PM259310 now states that an enduring genuine contribution giving rise to real risk will not trigger the rule.

What happens when a member is a salaried member?

Under section 863A(2), the member is treated for income tax as employed by the LLP under a contract of service, and their rights and duties as a member are treated as rights and duties under that contract. In practice (PM260200):

the LLP operates PAYE on amounts paid or credited to the member, including monthly drawings and any variable profit share;
the LLP pays employer’s Class 1 National Insurance;
the member stops reporting a partnership share on their Self Assessment return for that income, and their self employed basis comes to an end.

If HMRC finds that an LLP has failed to treat someone as a salaried member, it is a PAYE failure and the LLP is liable for the tax that should have been deducted (PM260300). Firms should keep a written record of each member’s test results.

How do the three tests work together in practice?

Illustration only. Dan becomes a member of an LLP at the start of the tax year. His expected reward is a fixed £90,000, a bonus of up to £15,000 based on his own billings, and a share of the firm’s overall profit expected to be £10,000, a total of £115,000. The fixed sum and the personal bonus are disguised salary: £105,000, or 91% of the total, so Condition A is met. He sits on no management body and has no say in strategy, so Condition B is met. For Condition C, 25% of £105,000 is £26,250. With capital of £20,000, Condition C is met and Dan is a salaried member taxed through PAYE. If he instead contributes £30,000 on joining, funded by a full recourse bank loan he services himself and with no right to withdraw it while a member, Condition C is not met and he is taxed as a self employed member.

What mistakes do LLPs make?

Testing members only once, on joining, instead of at the start of each tax year and whenever pay or capital changes.
Counting current account balances or refundable capital as contribution.
Treating a personal performance bonus as a profit share.
Assuming a seat on a divisional committee gives significant influence over the whole LLP.
Using a corporate member or an intermediary to sidestep the rules; section 863G(2) to (4) can treat the individual as a salaried member anyway, and the mixed membership rules may also apply.

For how profit shares are allocated among members who remain self employed, see how partnership profits are shared for tax. For the PAYE side, see PAYE tax codes and HMRC employer compliance checks.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.