Specialist US UK Tax Services: LLP Salaried Member Rules

An American member of a UK LLP who meets all three salaried member conditions is taxed by HMRC as an employee, with PAYE and Class 1 National Insurance, while the United States generally continues to treat the same person as a partner in a foreign partnership. Two returns must therefore describe one income stream in two different ways, and reconcile.

That is the problem this guide addresses. It is a preparation problem rather than a planning one, and it is where Specialist US UK tax services earn their keep: the UK payslip says salary, the US analysis says partnership income, and neither document is wrong. At Jungle Tax we prepare both returns for US citizens and green card holders in London law, consulting and fund management LLPs, and the salaried member file is one of the most frequently mis-prepared we inherit. The usual error is simple. A preparer sees a P60, enters foreign wages, and stops.

This guide does not repeat our separate pieces on Form 8865 filing categories for UK LLP members or on priority profit shares. It deals only with the member whom HMRC treats as an employee, and with what happens when that status changes.

What are the UK salaried member rules?

The rules sit in sections 863A to 863G of the Income Tax (Trading and Other Income) Act 2005 and have applied since 6 April 2014. Their starting point is that an individual member of a UK LLP is ordinarily taxed as a self-employed partner. The rules displace that presumption where the member's position is, in substance, closer to employment. They apply only to UK LLPs formed under the Limited Liability Partnerships Act 2000, not to general partnerships and not to overseas LLPs.

A member is a salaried member only if all three statutory conditions are met at the relevant time. Failing any one of them is enough to remain a self-employed partner for UK tax purposes. HMRC's own interpretation is set out in the salaried members section of the Partnership Manual.

Condition A: disguised salary

Condition A is met where it is reasonable to expect that at least 80% of the total amount payable by the LLP for the member's services will be disguised salary. 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 those overall profits or losses. HMRC's guidance on Condition A makes the point that a bonus calculated on personal billings, a team's revenue or an individual fund's performance is still disguised salary, because it does not track the profit of the firm as a whole.

That last point catches many senior people. A portfolio manager whose reward is a percentage of the book they run, or a consultant paid on personal origination, may have highly variable pay and still meet Condition A.

Condition B: significant influence

Condition B is met where the mutual rights and duties of the members do not give the individual significant influence over the affairs of the LLP. In July 2026 the Supreme Court gave a unanimous judgment on this condition ([2026] UKSC 18), endorsing a narrow reading: only influence that derives from legally enforceable rights and duties under the LLP agreement or statute counts, and it must be influence over the affairs of the LLP as a whole. Commercial importance, seniority, client following or responsibility for a desk or department does not suffice on its own.

The practical consequence is that fewer members than previously thought can rely on Condition B. In a large firm, it is realistically available to those who sit on the management board or an equivalent body with real constitutional authority.

Condition C: capital contribution

Condition C is met where the member's capital contribution to the LLP is less than 25% of the disguised salary that it is reasonable to expect will be payable in the relevant tax year. A member expecting £600,000 of disguised salary therefore needs at least £150,000 of contributed capital to fail the condition.

The condition is tested at the start of each tax year and again when the contribution or the surrounding arrangements change. A targeted anti-avoidance rule disregards arrangements whose main purpose is to secure that the salaried member rules do not apply. HMRC's guidance at PM259200, revised in 2025, accepts that a genuine contribution which is intended to be enduring and exposes the member to real risk is not caught, including where the capital is topped up as remuneration rises and where it is funded by commercial borrowing.

What happens in the UK when all three conditions are met?

The member is treated as employed by the LLP under a contract of service. The consequences follow mechanically:

• PAYE. Income tax is withheld from each payment through payroll and reported in real time. The member receives a payslip and, after 5 April, a P60.
• Class 1 National Insurance. The member pays primary contributions, at 8% on earnings between the primary threshold and the upper earnings limit and 2% above it. The LLP pays secondary contributions at 15% on earnings above £5,000 a year.
• Benefits code. Benefits provided to the member are taxed as employment benefits and reported accordingly.
• Deduction for the firm. The member's remuneration and the employer contributions become a deductible expense in computing the LLP's profits, rather than an allocation of those profits.
• Self assessment. The member is no longer shown as a partner on the firm's partnership statement for the salaried period. Their own return carries an employment page instead of partnership pages.

Two points are often missed. First, the member remains a member. Their name stays on the register at Companies House, they remain a party to the members' agreement, and their capital remains at risk in the firm. Only the tax characterisation changes. Second, the economic cost of the 15% secondary contribution frequently lands on the member, because many firms set the fixed share net of it. That matters for the US computation, as explained below.

Does the IRS follow HMRC and treat a salaried member as an employee?

No. The salaried member rules are a UK deeming provision. United States federal tax law does not import them, and applies its own tests to the same facts.

First, confirm how the LLP itself is classified

Before any question of partner status, the US classification of the entity must be established. A UK LLP is a foreign eligible entity. Under the default rules, a foreign entity in which every member has limited liability is treated as a corporation unless it has filed Form 8832 electing partnership treatment. Most international LLPs with American members made that election long ago, but it should be confirmed with the firm in writing rather than assumed. Everything in the remainder of this guide proceeds on the footing that the LLP is a partnership for US purposes. If it is not, the member holds shares in a foreign corporation and an entirely different reporting regime applies.

Second, establish whether you are a partner for US purposes

The IRS's long-standing position, set out in Revenue Ruling 69-184, is that a bona fide member of a partnership is not an employee of that partnership. A member who holds capital in the firm and participates in its profits under the members' agreement is ordinarily a partner for US purposes, whatever HMRC's label. That describes most salaried members, because UK firms typically require some capital and offer at least a modest profit-linked element.

Where a member has contributed no capital, has no share in profit and no say in the firm, the US answer is less automatic and turns on the facts. It should be analysed and documented once, at the outset, and then applied consistently. If the firm itself prepares US partnership information for its American members, the individual return should be consistent with it.

Third, characterise the income

For a partner, a fixed amount paid for services and determined without regard to the income of the partnership is a guaranteed payment under Section 707(c) of the Internal Revenue Code. This maps closely onto what the UK calls disguised salary. A guaranteed payment is ordinary income, it is reported with partnership income on Schedule E rather than as wages, and it is included in the partner's income for the partnership tax year ending with or within the partner's own tax year. It is also net earnings from self-employment.

The result is that the same £400,000 appears as employment income on a UK return and as partnership income on Form 1040. Neither the payslip nor the P60 is a US wage statement.

US versus UK treatment of a salaried member

Issue	UK / HMRC	US / IRS
Status of the individual	Deemed employee of the LLP while Conditions A, B and C are all met	Generally a partner in a foreign partnership, assuming a Form 8832 partnership election
Character of fixed remuneration	Employment income	Guaranteed payment under Section 707(c), reported on Schedule E
How tax is collected	PAYE withholding on each payment	No withholding; estimated payments where foreign tax credits do not cover the liability
Timing of income	On receipt, within the tax year ending 5 April	For the partnership year ending with or within the calendar year
Social security	Class 1 National Insurance, primary and secondary	Self-employment tax at 15.3% in principle, relieved under the totalization agreement
Firm-level reporting	Payroll submissions; excluded from the partnership statement for the salaried period	Schedule K-1 equivalent information; Form 8865 where a filing category applies
Individual return	SA100 with SA102 employment page	Form 1040 with Schedule E, Form 1116 and a totalization statement
Capital contributed to the firm	Counts towards Condition C	Contribution to a foreign partnership, potentially reportable on Form 8865 Schedule O

How does the mismatch affect social security and self-employment tax?

This is where the largest avoidable overpayments arise. A guaranteed payment for services is self-employment income, and self-employment tax is charged at 15.3% up to the annual social security wage base and at 2.9% above it, with a further 0.9% Additional Medicare Tax on higher earners. None of that can be offset by a foreign tax credit, because self-employment tax is not an income tax.

Relief comes from the US-UK social security agreement, which assigns coverage to one country. A member living and working in the United Kingdom and paying Class 1 contributions through the firm's payroll is covered by the UK system. The exemption from US self-employment tax is claimed by obtaining a certificate of coverage from HMRC and attaching a copy, with a statement, to the US return each year. The IRS describes the mechanism on its totalization agreements page.

The salaried member adds a wrinkle. The certificate request is being made by someone HMRC regards as an employee, in support of an exemption from a US tax on the self-employed. The application and the statement on the US return should explain the mismatch in terms, so that the exemption is not questioned later. We also see the opposite failure: a return on which the income was entered as foreign wages, so that Schedule SE was never triggered and no certificate was ever obtained. The tax result may be the same, but the file would not survive scrutiny.

Class 1 contributions themselves are not creditable against US income tax. Contributions paid to a country with which the United States has a totalization agreement are excluded from the foreign tax credit.

How do foreign tax credits work when UK tax is paid through PAYE?

UK income tax withheld under PAYE is a creditable foreign income tax, claimed on Form 1116 in the general category. Three points need deliberate handling.

• The credit year. A cash-basis taxpayer credits UK tax in the calendar year it is paid. PAYE is paid month by month, which is far better aligned with the US year than the January and July instalments of a self-employed partner. But the US includes a guaranteed payment by reference to the partnership's year end, not the date of the payslip. If the LLP's US tax year ends on 31 March, PAYE withheld between April and December 2025 relates to income that reaches the 2026 Form 1040. An election to credit foreign taxes on the accrual basis usually removes the distortion, but once made it applies to all future years.
• Source. Compensation for services is sourced where the services are performed. Days worked in New York for a transatlantic client produce US-source income on which a foreign tax credit is restricted, unless the treaty re-sourcing rule is claimed and disclosed.
• The amount of income. The US figure is the member's guaranteed payment and any distributive share computed under US principles. It is not automatically the gross pay figure on the P60. Where the firm has reduced the fixed share to fund secondary contributions, the member's income is the reduced amount, and the employer contribution is a cost of the firm.

The United Kingdom tax rate on a senior member's income, 45% above £125,140, will usually exceed the US rate, so the expected US income tax after credits is nil. A balance due on the US return of a UK-resident salaried member is therefore a warning sign that the timing, the source or the character has been mishandled.

What happens when status flips part-way through a year?

Salaried member status is not fixed for a tax year. The conditions are applied when the member joins, when their arrangements change, and in the case of Condition C at each 6 April. A promotion, a revised remuneration structure, a capital call, a seat on the management board or a de-equitisation can each move a member across the line on a specific date. The UK treatment changes from that date. The US treatment, in most cases, does not change at all, and that asymmetry is what causes the damage.

From salaried member to self-employed partner

Take a member promoted to full equity on 1 October 2026. For the UK tax year 2026 to 2027, the period from 6 April to 30 September is employment income taxed under PAYE. From 1 October the member is treated as commencing a trade as a partner. Their profit share for the rest of the tax year is taxed through self assessment, with nothing withheld, and the tax falls due on 31 January 2028 together with a first payment on account for the following year.

On the US side the member was a partner throughout. What changes is the mix, less guaranteed payment and more distributive share, and the timing of UK tax. During calendar year 2027 the member earns a full year of profit share and pays almost no UK income tax on it, because the first self assessment payment is not due until January 2028. On the cash basis the 2027 Form 1040 shows substantial foreign income with little foreign tax to credit, and real US tax is payable. The excess credit that arises in 2028 can be carried back one year, but only by amending. This is the single strongest reason to consider the accrual election before, not after, a promotion.

From self-employed partner to salaried member

The reverse case produces the opposite distortion. A member who moves onto a fixed share during 2026 begins to suffer PAYE immediately, while still owing the balancing payment and payments on account for earlier self-employed profits. Two layers of UK tax are paid in one calendar year. On the cash basis that creates excess credits, which carry back one year and forward ten, and are of limited use to someone whose UK rate permanently exceeds the US rate. HMRC will also continue to demand payments on account based on the previous year's self assessment liability unless a claim is made to reduce them.

Capital movements at the point of change

A flip is very often accompanied by a capital contribution, either because promotion requires it or because the firm raises capital to keep fixed-share members outside Condition C. For US purposes a contribution of cash to a foreign partnership is reportable on Form 8865 as a Category 3 filing where the member contributes more than $100,000 in a twelve-month period, or holds at least a 10% interest immediately afterwards. A member expecting £500,000 of disguised salary needs £125,000 of capital to fail Condition C, which is comfortably above that threshold. The UK-driven top-up therefore creates a US information return that the firm's finance team will not mention, because it is not their filing. The form and its instructions are on the IRS page for Form 8865.

What must each return show?

The UK return

• An SA102 employment page for each period as a salaried member, agreed to the P60 or P45 and to any benefits statement.
• Partnership pages for any period as a self-employed partner in the same tax year, agreed to the firm's partnership statement.
• Commencement or cessation dates as a partner that match the date on which the conditions ceased or began to be met, as recorded by the firm.
• Payments on account reviewed and, where status has moved to PAYE, reduced by claim.
• Any US-source income and the credit claimed for US tax on it, if US workdays are material.

The US return

• Guaranteed payments and any distributive share on Schedule E, translated to dollars on a consistent basis, with supporting information from the firm computed on US principles.
• Schedule SE either completed or, far more commonly, displaced by a totalization statement and a copy of the HMRC certificate of coverage.
• Form 1116 for the general category, with the credit year, the cash or accrual basis and any re-sourced income clearly established.
• Form 8865 where a category applies, including Category 3 for capital contributions and Category 4 for reportable acquisitions, disposals and changes in interest.
• Form 8938 for the partnership interest where the reporting thresholds are met and it is not already reported on Form 8865, and an FBAR for personal UK accounts and any firm accounts over which the member holds signature authority.

The two returns should then be reconciled to each other for the same economic period. Where the UK figure and the US figure differ, as they will, the difference should be explained on file: tax year against calendar year, employer contributions, exchange rates and US-basis adjustments.

What if earlier years were filed as foreign wages, or not filed at all?

This is the position of many of the salaried members who come to us. Some have filed for years with the firm's remuneration entered as foreign salary. Others, often accidental Americans who qualified in London and have never lived in the United States as adults, have filed nothing.

Where income was simply mischaracterised and no US tax was underpaid, the remedy is usually to correct the characterisation going forward, obtain the certificate of coverage, and file any missing Form 8865, Form 8938 or FBAR with a reasonable cause explanation. Where returns or information forms are missing altogether and the failure was non-wilful, the IRS streamlined procedures are generally the appropriate route. A member resident outside the United States who meets the non-residency test files three years of returns and six years of FBARs under the Streamlined Foreign Offshore Procedures, with no miscellaneous offshore penalty. Our IRS streamlined filing team prepares these submissions, and for a salaried member the narrative must explain the UK status accurately, because the certification is signed under penalty of perjury.

On the UK side, a member who was wrongly treated as self-employed when the conditions were met is primarily the firm's problem, since the PAYE and secondary contribution liabilities are the LLP's. The individual's returns will nonetheless need amending, and their US credits for those years will move with them. Our UK tax and US tax preparers handle the two sides together for precisely this reason.

A preparation sequence that works

1. Obtain the firm's status confirmation for each tax year: salaried member or not, the condition relied on, and the exact date of any change.
2. Confirm the US entity classification and whether the firm produces US-basis partner information.
3. Collect the documents for both characterisations: payslips, P60 or P45, benefits statement, partnership statement, capital account statement and the members' agreement schedule setting out the fixed and variable elements.
4. Map each UK amount to its US character and to the US year in which it is included.
5. Secure the certificate of coverage and settle the foreign tax credit basis before the first return in the series is filed.
6. Test every capital movement against the Form 8865 thresholds.
7. Prepare the UK return first, then the US return, then reconcile the two and record the differences.

Primary sources

• HMRC Partnership Manual, PM250000 onwards, on salaried members and Conditions A, B and C.
• IRS, About Form 8865, Return of US Persons With Respect to Certain Foreign Partnerships.
• IRS, Totalization Agreements, on exemption from US self-employment tax.
• IRS, About Schedule SE (Form 1040).

Speak to a team that prepares both returns

A salaried member's affairs are not complicated because the amounts are large. They are complicated because two tax authorities describe the same person differently, on different calendars, and each return must be right on its own terms and consistent with the other. Jungle Tax prepares US and UK returns side by side for American members of UK LLPs, including catch-up filings for earlier years and the year in which status changes. If you have been told you are a salaried member, have recently been promoted or moved onto a fixed share, or suspect that earlier US returns treated your remuneration as ordinary wages, contact our cross-border team for a confidential consultation with our US UK tax accountants.