UK Chancellor of the Exchequer Rachel Reeves has scrapped the plan to increase national insurance contributions for partners at law and accountancy firms in the upcoming Budget. The move was expected to generate £2bn but has been abandoned due to potential higher costs than benefits from tax avoidance.

Treasury modelling showed that the proposed policy could lead to increased costs outweighing benefits. Most large law and accountancy firms in the UK operate as limited liability partnerships (LLPs) to receive favorable tax treatment despite high margins.

Chancellor Reeves and Prime Minister Sir Keir Starmer have also abandoned a proposal to raise income tax rates following improved fiscal outlook. The expected fiscal gap has reduced from up to £30bn to around £20bn.

The Centre for the Analysis of Taxation estimated that adding national insurance contributions for LLP partners would impact 200,000 individuals and raise £1.9bn annually. This would have increased the tax rate for partners by nearly 7%.

Lawyers, Big Four accountancy groups, and private equity executives strongly lobbied against the introduction of national insurance contributions for LLP partners. Firms warned that LLPs might restructure or relocate partners overseas to avoid the tax, potentially passing on the tax burden to clients through higher fees.

Read more at Yahoo Finance: NI contribution hike for LLP partners to be ruled out in UK Budget