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The UK legal sector may be forced to pay the government hundreds of millions of pounds from interest earned on client accounts “to help strengthen the justice system”, threatening the future of some law firms.
The Ministry of Justice has proposed taking 75 per cent of interest earned from pooled client accounts in law firms — money held on behalf of clients while a transaction is pending — and 50 per cent from individual client accounts.
This equates to the majority of roughly £350mn a year made from client account interest at the top UK 200 firms by revenue in 2024, according to an analysis of Companies House accounts by Adil Taha, a former private equity executive and founder of legal consultancy Taha & Watmough.
About £250mn in client interest had already been recorded for last year by those firms that had filed their 2025 accounts, said Taha, who has also managed law firms and shared his findings with the FT.
“Funds raised . . . will help strengthen the justice system,” said the MoJ in a consultation document last week.
The ministry’s proposal, which would apply to England and Wales, comes after years of debate around who should benefit from the interest accrued on client accounts.
A number of law firms, particularly smaller ones, often retain funds to cover costs and bolster profits, adding significant revenues to some practices in recent years amid high interest rates. The Solicitors Regulation Authority, the legal regulator for England and Wales, states that firms should pay a “fair” sum to their clients.
The move by the MoJ comes after the government abandoned plans late last year to add national insurance contributions to the tax bills of partners in Limited Liability Partnerships (LLPs) in an attempt to help plug the UK’s fiscal black hole.
“The backtracking on the LLP NI tax proposal a few months ago followed by this feels like a rushed and desperate attempt to find more tax revenue,” Taha said.
But Taha added that some firms had also been relying on client interest to prop up their businesses and profits for too long.
“Private equity has been calling law firms out on this during due diligence processes when assessing whether to acquire stakes in law firms in recent years,” he said. “It became obvious very quickly that law firm partners were not only booking client interest as revenue but were topping up partner profit allocations too.”
A law firm holding £200mn in an account for five days could have made more than £100,000 in interest when rates were 4 per cent last year.
For some smaller firms, client account interest has bolstered profits. Taylor Rose, a top 60 UK law firm that offers advice on everything from family law to personal injury, reported £7.34mn in operating profit for 2024 and £7.3mn in client interest.
The firm said in its accounts that it is “naturally hedged; as interest rates rise, interest receivable on the client account will rise”. But any change to the client account rules would mean “we have to pass on more or all of the interest to clients”, it added.
AIIC Group, which owns Taylor Rose, said in a statement: “The year in question was heavily impacted by a cyber attack on a third-party IT service provider that affected many firms, and had a highly detrimental impact on our operating profits that elevated the relative prominence of client interest.
“Changing the long-standing rules on client account interest would, in our view, introduce unnecessary complexity into routine transactions and risk poorer outcomes for consumers due to complications; likely negative effects in terms of speed of transactions, client experience and higher fees; and most likely many small high-street law firms going out of business.”
However, the government has pointed to the US, Canada, France and Australia as examples of other nations that force firms to pay interest back to support their justice systems.
The MoJ said in a statement that the government had “inherited a justice system in crisis”.
“We’re exploring how interest earned on accounts — a tried and tested idea already operating in many countries around the world — could be invested to strengthen our justice system, making it fairer and more accessible for all,” it added.
