Setting up a partnership or Limited Liability Partnership (LLP) allows a group of people and organisations to work together in business. But what do these structures mean for pension auto-enrolment? To help you understand what’s what, we’ll look at:
A partnership is where two or more people (or organisations!) set up in business together. For instance, two friends with complementary skills might decide to team up and work together. On the other end of the scale are partnerships which have hundreds, even thousands, of partners.
If they formed a limited company, then the business would pay tax as a separate entity, and they would be paid by the company. In a partnership the tax is a bit different, and although it submits a tax return, it doesn’t actually pay tax itself. Instead, partnerships are ‘transparent’, in that HMRC ‘look through’ the partnership to the partners, and they’re the ones that pay the tax.
Partnerships are as varied as any other business type, and you often find doctors’ surgeries, accountants, architects, and lawyers working as partnerships.
A Limited Liability Partnership (LLP) is a formal method of forming a partnership that protects the partners. Largely similar to a partnership in terms of tax, one of the key differences is that it offers the same sort of limited liability to its partners that a limited company does.
The key difference between a general partnership and an LLP is the liability of the partners. In an LLP their personal liability is limited, so their personal assets have more protection.
Are partners exempt from auto-enrolment?
At this point it’s probably useful to explain what auto-enrolment usually means. In short, UK employers must set up a workplace pension scheme and automatically enrol eligible employees on to it.
Partnerships and LLPs can employ people just like any other business, and must pay them according to the same rules that apply to all employers. This usually involves paying employees through the normal PAYE system.
The same principle goes for auto-enrolment onto a pension scheme. Basically, if a person is defined as a worker, then they must be included in the auto-enrolment process.
All of the usual eligibility criteria still applies and like any other worker, they can decide to opt-out of the scheme. The problem can sometimes be deciding who is actually classed as an employee, and therefore eligible for auto-enrolment.
Salaried partners, as the name suggests, draw a regular salary from the partnership. They often have a say in the strategic direction of the business, and they can share in the profits at the end of the year.
Most important in the case of this article, is that salaried partners are treated just like employees for tax and pension purposes.
Because they receive a salary and are paid through the normal payroll process, it makes things a bit more obvious.
Then we have the non-salaried partners, and this is where it gets a bit more complicated. Even though a partner might not receive a salary, they might still be classed as a ‘worker’ for pension purposes, and this could make them eligible for auto-enrolment rules.
It’s also worth noting that the definition of ‘worker’ for the purposes of pensions is subtly different to the definitions used for tax, employment, immigration, and IR35 rules. Make sure you assess each position using the right legislation!