Legal sector warns against tax ‘raid’ proposal on client account interest ahead of Budget
London’s legal sector has sounded the alarm over government plans to cut interest on law firms’ client accounts to fund the justice department, warning it could drive some law firms out of business.
The Ministry of Justice’s consultation on a proposal to introduce an Interest on Lawyers’ Client Accounts Scheme (ICLA) closed in March after previous secretary of state for justice, David Lammy, launched it in January.
This comes as a question mark looms over whether the government has plans to propose additional tax on law firms in the upcoming Budget, after former chancellor Rachel Reeves floating plans in last year’s Budget to extend National Insurance Contributions (NICs) taxes to include limited liability partnerships – LLPs – to whom the tax does not currently apply.
City of London Law Society (CLLS) chairman, Colin Passmore, told City AM the scheme is “clearly problematic for smaller firms across the country that provide vital services to their clients” and so the group “remains opposed to the proposal”.
“Diverting interest on lawyers’ client accounts is, in effect, another attempt — following the abandoned City levy and last year’s NIC proposals — to impose additional forms of taxation on the solicitors’ profession,” Passmore said.
“None of these measures promote the legal services sector. Instead, they divert time and resources into proposals that will only increase costs for clients, undermine access to justice, and risk driving individuals and businesses towards unregulated providers at a time when confidence in the justice system is already under pressure,” he added.
A spokesperson for the MoJ said: “The department is carefully considering the responses and will respond in due course.”
“This government inherited a justice system in crisis but we’re investing record amounts and reforming the system to deliver swifter justice for victims,” they added.
“We’re also exploring how interest earned on client money held by law firms could be invested to benefit the system as a whole – a tried and tested idea already operating in many countries around the world.”
Lord chancellor and current secretary of state for justice, Alex Norris, has yet to confirm whether he will take the proposal forward from predecessor Lammy.
In the foreword of the proposal, Lammy said the scheme is “a way for the legal sector to contribute more to the justice system it relies on”, and that “currently, many firms retain interest generated on client accounts as income. We believe that unearned income could be better invested in strengthening our justice system”.
Under the scheme, 75 per cent of interest generated on lawyers’ pooled client accounts would be remitted to the government.
The government is also considering 50 per cent of the interest earned on lawyers’ individual client accounts, which are often used for longer term, more substantial work such as corporate and property transactions, to be remitted to the government.
Nick Leale, Partner at CM Murray told City AM: “Despite heavy criticism from within the legal services industry the government seems uninterested in ring-fencing the money for law access or legal aid projects as such schemes do in other countries. They still plan to absorb money centrally.”
“The government appears to be building the system before properly considering the thoughts from the consultation which will probably only enhance the backlash from the profession who are getting wind of the government’s approach,” Leale added.
The Law Society of England and Wales, a body which represents solicitors, also warned against the scheme.
The organisation’s president, Mark Evans, told City AM the interest cutting proposal “cannot and should not proceed” as it “is flawed, sets a damaging precedent and conflicts with wider government commitments on growth. It is simply not fit for purpose.”
Evans said the proposal “is a raid on clients’ money to generate an unreliable source of revenue for the justice system and to address general budget shortfalls” and that it “would fundamentally change the rules of the game by making the MoJ a tax-raising department funded through clients of legal services.”
“While estimates vary, the scheme would be unlikely to generate more than a tiny fraction of the MoJ’s overall budget and is unlikely to be a significant or reliable new source of revenue. Implementing such a scheme would be disruptive to firms’ finances and banking arrangements, and would impose new costs on clients,” Evans said.
‘Hundreds of law firms will go out of business’
According to data from legal advisory firm, Taha Capital, the UK’s top 200 law firms made approximately £250m to £295m in client account interest in 2025, following £350m in 2024.
Adil Taha, founder of Taha Capital, told City AM “the reliance on client accounts interest is now as high as it’s ever been.”
“If the MoJ is successful in taking client interest from law firms there will be hundreds of law firms that will go out of business,” Taha said.
Taha added that many equity partners rely on client interest in their take home profit, and if the MoJ’s proposal moves ahead, the ministry “will actually lose money” as “partner profits will fall, meaning tax revenues will fall.”
Sam Nicholls, director at consultancy Kindleworth said the MoJ’s “interest in ILCA could create clear winners and losers across the UK legal sector.”
“The majority of law firms won’t feel any impact, but those that hold significant client balances could see a long-standing source of profit disappear overnight, which in the more extreme examples will be propping up PEP [profit per equity partner],” Nicholls said.
The Treasury was contacted for comment.