Two Proposals Firms Need to Watch
On 28 October 2026, Chancellor of the Exchequer John Healey will deliver the Autumn budget, and with that date fast approaching, two proposals affecting law firms’ finances are in circulation, and both could have a material impact on how firms manage their income.
The first is the Interest on Lawyers’ Client Accounts Scheme, or ILCA, published under the 2024 to 2026 Starmer Labour government, on which the Ministry of Justice consulted earlier this year. Although the current Lord Chancellor, Alex Norris, has not confirmed whether the proposal will proceed, and as reported by the Gazette, the MoJ has already advertised for two senior civil servants to lead the scheme’s implementation. That suggests the department is preparing to move forward regardless of the consultation’s outcome. Under the scheme as consulted on, 75% of interest generated on pooled client accounts would be remitted to the government, along with 50% of interest earned on individual client accounts.
The second proposal, which remains unconfirmed, relates to an extension of employer National Insurance Contributions to limited liability partnerships. This was floated ahead of last year’s Budget but was not implemented. Whether it reappears this time is an open question, but it remains a live risk for any firm structured as an LLP.
The Numbers Behind the Concern
The NatWest Legal Benchmarking Report, one of the sector’s most respected financial surveys, paints a clear picture of how exposed firms are. Interest still commonly accounts for at least 20% of a firm’s trading surplus. Half of the 112 firms surveyed reported that between 5% and 28% of their profit per equity partner arose from interest profits in 2025-26.
That exposure has reduced slightly from the previous year, when the equivalent range was 9% to 35%, driven by a combination of lower base rates and increased payments of interest across to clients under the SRA Accounts Rules. But the report is clear that current levels of reliance on interest income are broadly in line with pre-2008 levels, and the experience of the legal sector between 2008 and 2012, when law firms lost this income source as the base rate crashed, included financial failures and rising prices.
Results of the benchmarking survey, published in an article by The Law Society Gazette, found that 11% of respondents believe the primary consequence of the ILCA scheme would be financial failure of law firms. As the report notes, if that held across the sector as a whole, it would mean a substantial number of firm failures and a significant increase in the regulatory interventions required to protect clients. Nearly one in three firms said the scheme would inflate the cost of legal services. Source: The Law Society Gazette – Many law firms set to fail without interest income – benchmarking survey
This sits against a backdrop where headline growth is already stalling. Median PEP rose just 2% in 2026, down from 23% in 2025. The employers’ national insurance rise introduced in April has reduced margins by 1% to 2% at many firms. And productivity remains a persistent challenge: only 15% of firms reported fee-earners logging over five chargeable hours per day, with nearly a third reporting fewer than four.
The Law Society has described the ILCA proposal as “a raid on clients’ money” and warned it would increase costs for clients, undermine access to justice, and risk driving individuals and businesses towards unregulated providers. The City of London Law Society has called it “another attempt to impose additional forms of taxation on the solicitors’ profession.” Source: City AM – Legal sector warns against tax ‘raid’ proposal on client account interest ahead of Budget.
RACO Will Monitor and Provide Guidance for Firms
Neither proposal has been confirmed, and the MoJ has said it is “carefully considering the responses” to the consultation. But the recruitment of staff to implement the scheme, combined with the Budget timetable, means firms should be treating this as a realistic prospect rather than a distant possibility.
Our compliance teams are tracking both proposals closely. If either is confirmed in the Budget, or if the government publishes its response to the ILCA consultation before then, we will provide further guidance on what it means for firms and what steps they should be taking.
In the meantime, if your firm holds significant client account balances and you have not recently reviewed how dependent your financial model is on interest income, now would be a sensible time to do so. Our Detailed Firm Strategic Review is designed for exactly this kind of assessment, covering financial performance, income dependencies, risk exposure, and the structural decisions that flow from them. For firms where client account interest represents a material part of partner drawings or operational income, understanding that exposure before a decision is confirmed is considerably better than discovering it afterwards.
Speak to Our Compliance Team
To discuss how these proposals could affect your firm, arrange a strategic review, or ask questions about the Regulation and Compliance Office and how we can support your Law Firm, please call us on 0203 985 8550, complete the online enquiry form, or email us info@regulationandcomplianceoffice.co.uk
