What do law firms need to know about the proposed changes to client account interest?
Law firms across England and Wales should be paying close attention to a new Government proposal that could change how client account interest is treated.
While the changes are not yet in force, the Ministry of Justice (MoJ) has launched a consultation that could have financial and operational consequences for many practices, especially small and high-street firms.
Firms must understand what is being proposed and how they can prepare their cash flow for the potential impact.
What is being proposed to client account interest?
The MoJ is consulting on the introduction of an Interest on Lawyers’ Client Accounts (ICLA) scheme.
Under the proposal, a portion of the interest earned on client money held by law firms would be redirected to the Government to help fund a sustainable justice system.
The proposal would require:
- 75 per cent of interest earned on pooled client accounts to be remitted to the Government
- 50 per cent of interest earned on individual designated client accounts to be remitted
The scheme would also apply to Third Party Managed Accounts (TPMAs).
The remaining interest would then continue to be dealt with under the existing arrangements between firms and clients.
Similar schemes do operate in other jurisdictions such as the US, Canada and Australia, although these systems often protect funds specifically for legal aid rather than general Government budgets.
How could this effect law firms?
For many firms, particularly smaller practices, client account interest is a crucial part of their day-to-day cash flow.
While it may not be viewed as profit, it often helps offset the cost of running compliant client accounts, managing administrative burdens and keeping fees competitive.
If a large portion of this interest is redirected, firms may need to review:
- Pricing structures and charge-out rates
- The costs of increased administration
- How client account operations are funded
- Cash flow forecasts to reflect the reduced income
The MoJ’s research from June 2024 found that only 92 per cent of 604 legal service providers said that they are not reliant on client account interest and losing it would have little or no impact.
However, this data was gathered before the full effects of higher interest rates were felt.
Many firms are currently receiving higher than usual returns, making the proposed changes more significant than they may appear on paper.
There is also a concern that the additional administrative requirements, such as automatic or manual remittance of interest, could further increase costs for firms.
What should law firms do in response to the proposal?
The MoJ opened a consultation until 9 February 2026, which gave firms a limited window to understand the implications and submit informed responses.
If these proposals are implemented, they could affect your firm’s finances, particularly if interest rates fall and margins tighten further.
With the right financial planning, firms can reduce their reliance on client account interest and maintain stability, whatever the outcome of the consultation.
Our expert team can help model the financial impact of reduced client account interest and reforecast your cash flow to reflect the potential income changes.
We want your firm to build financial resilience and we can assess if restructuring debt repayments or exploring alternative income streams can boost your firm’s profitability and cash flow.
Our team can help you stay informed on the potential proposals and protect your financial position so you feel prepared for any changes coming your way.
For further advice on managing your finances, contact our legal accountants today.