How to Structure Profit Shares in a UK Limited Liability Partnership

One of the main advantages of running a business as a Limited Liability Partnership (LLP) in the UK is the flexibility it offers. Unlike a limited company, where profits are usually distributed as dividends in proportion to shareholdings, an LLP allows its members (sometimes called partners) to decide for themselves how profits should be divided.

This flexibility means you can design a system that reflects contributions fairly rewarding people for leadership, investment, or performance. But it also means there are rules to follow and pitfalls to avoid, especially when it comes to tax, National Insurance, and HMRC anti-avoidance rules.

This post will walk you through the essentials of LLP profit distribution, explaining not just what the rules are, but also why they matter, and the practical impact they have. Whether you’re setting up a new LLP or reviewing your existing profit-sharing arrangements, this post is designed to help you understand the concepts clearly.

The Default Rules (If You Don’t Have an Agreement)

By law, if an LLP does not have a written agreement, profits must be shared equally among members, regardless of how much time, effort, or capital each has contributed.

This comes from the Limited Liability Partnerships Regulations 2001, Regulation 7:
https://www.legislation.gov.uk/uksi/2001/1090/schedule/2/made

Example: If four people set up an LLP without an agreement and make £100,000 profit, each would be entitled to £25,000 even if one partner put in most of the work or capital.

Most LLPs avoid this by creating a bespoke LLP agreement, which sets out a profit distribution model tailored to their business.

The LLP Agreement: Why It Matters

An LLP agreement is a legal contract between members that spells out how the LLP is run including profit distribution. Without one, you’re stuck with the default “equal share” rule.

Your agreement can cover:

• Equity percentages – Each member gets a set share, e.g. 40%/30%/20%/10%.
• Priority Profit Shares (PPS) – Special allocations for specific roles, like Managing Partner.
• Capital interest – A return on capital invested in the LLP.
• Performance pools – Bonuses linked to targets, e.g. sales growth or client satisfaction.
• Drawings policy – Rules on how much cash members can take out during the year.
• Joiner and leaver terms – How profits are split when members join or exit mid-year.

Reference: HMRC Partnership Manual PM163040 – https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm163040

Common Profit-Sharing Models

There’s no “one size fits all.” LLPs often use one of these approaches, or a combination:

Fixed Percentages

Each member has a set profit share. Simple and predictable, but inflexible if contributions change over time.

Points-Based Systems

Members are allocated “points,” and profit is split according to how many points they hold. Points can be reassessed annually.

Example: A has 40 points, B has 30, C has 20, D has 10. If profits are £100,000, A gets £40,000, B £30,000, C £20,000, D £10,000.

Priority Profit Share (PPS)

Certain members (like the Managing Partner) get a defined share first, then the remainder is split by equity. PPS is useful for recognising roles but must still vary with LLP-wide profits to avoid HMRC treating it as “salary” (see below).

Waterfall Structures

Profits flow through layers: first capital interest, then PPS, then a final equity split. This is common in professional firms.

Performance Pools

A portion of profits is set aside for performance-based rewards, such as hitting targets. This can motivate, but needs transparent metrics to avoid disputes.

Profit Allocations vs Drawings

These terms are often confused, so let’s break them down:

• Profit allocation = The share of LLP profits each member is entitled to under the agreement. This is what HMRC taxes you on.
• Drawings = Cash you take during the year, usually as an advance against expected profits.

Important: You pay tax on your profit allocation, not on your drawings. Even if you leave profit in the LLP, you’re still taxed on your share.

Reference: HMRC Partnership Manual PM255670 – https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm255670

This is why many LLPs operate a tax reserve system, holding back 30–40% of profits to help members pay their Self Assessment tax bill.

National Insurance Contributions (NICs)

Members of an LLP are normally taxed as self-employed, not as employees. This means they pay:

• Class 2 NICs – A flat weekly rate (£3.50 per week for 2025/26).
• Class 4 NICs – A percentage of profits, charged on bands (similar to income tax).

Reference: NICs rates – https://www.gov.uk/national-insurance-rates-letters

If, however, a member is caught by the salaried member rules (explained below), they may instead be treated as an employee for tax and NIC purposes.

The Salaried Member Rules

These rules were introduced to stop LLPs disguising employment as partnership.

A member is taxed as an employee if all three of these conditions are met:

1. 80% disguised salary test – At least 80% of the member’s reward is fixed or not linked to LLP-wide profits.
2. Significant influence test – The member does not have real say in the LLP’s affairs.
3. Capital contribution test – The member’s capital contribution is less than 25% of their expected fixed reward.

Reference: HMRC Employment Status Manual (LLPs) – https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm

Update (2025): HMRC confirmed that genuine capital “top-ups” can count towards the 25% test, reversing earlier restrictive guidance.

This means LLPs should make sure members either:

• have a real variable share of overall profits, or
• invest meaningful capital at risk, or
• hold significant influence over the LLP.

Failing one of the tests is enough to avoid employee treatment.

Mixed-Membership LLPs

Some LLPs have both individual members and corporate members (companies). HMRC’s mixed-membership rules allow profits to be reallocated from the company back to individuals if it looks like the company is being used to avoid tax.

Example: An LLP allocates big profits to a corporate member taxed at 25% Corporation Tax, while individuals defer tax. If HMRC thinks individuals benefit, it can reallocate the profits back at personal income tax rates.

References:

• HMRC Partnership Manual PM228000 – https://www.gov.uk/hmrc-internal-manuals/partnership-manual/pm228000
• HMRC Corporation Tax Manual CTM61587 – https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm61587