The Autumn Budget 2024’s increase in Employers’ National Insurance to 15% presents a significant cost burden for law firms across all structures, potentially affecting hiring and salary strategies. Despite this, planning opportunities from tax changes could benefit firms, especially those in estate and client transaction services, if client activity remains strong.
Rising Staff Costs
The legal sector is a mix of sole trader practices, limited companies and traditional and LLP partnerships, but the one thing that links them all is staff costs. Therefore, the increase in Employers’ National Insurance of 1.2% to 15% and the lowering to the threshold when this is paid will affect the costs of employing people and is therefore a hit to most firms, and most unwelcome. Smaller practices will be shielded to some extend by the increase Employer Allowance. That said, how this will Play out in, potentially lower future salary increases and then hiring, and retention decisions will be interesting. I can imagine firms will be remodelling 2025 budgets given this increased cost base.
Focus on Growth and Client Transactions
Whilst these changes grab the headlines, firms will be likely more interested in whether The Budget as a whole will deliver the hoped for growth and any effect on transactions of clients, both personally and in business; law firms require transactions to generate their own activity. I can see firms’ Private Client and HNW teams being very busy looking at Estate planning given changes to Business Property Relief and Inherited Pensions. So, if that client planning work and transactional work still occurring means the firm does not take a hit to profits due to Employers NI increase, good news for firms and employees together but if the opposite effect, then cutbacks could be on the horizon. As always, tax changes can be planning opportunities and therefore fee generative for firms, so look at the opportunity, not the threat.
Potential Future Scrutiny of LLPs
Turning to those legal practices that do operate as LLPs, as regards the exemption on employers’ NI contributions for LLP members being withdrawn, this did not appear in this Budget. A word of warning though, don’t be surprised in the future that HMRC will begin scrutinising the ‘salaried member’ structures more closely. Specifically focusing again on situations where the business and certain members only meet Condition C (the 25% capital contribution requirement). This shift could broaden the scope of affected members and lead to an increase in employer National Insurance Contributions (NICs), as opposed to members paying NICs at the Class 4 rate. However, I believe HMRC would likely need a favourable tribunal decision to reinforce their stance before implementing such changes broadly.