The hidden £350m revenue stream quietly propping up law firm profits

For years, client account interest sat in the background of law firm finances - a useful but marginal line item, not much discussed and largely ignored by the market. That era is over.

As interest rates rose in recent years, client money has become a stealth profit driver for many of the UK’s law firms. Now regulators, the government and investors are all paying attention, some looking to access it for the justice system and others asking about the sustainability of a business model that relies on interest earned on clients’ cash rather than legal work.

From rounding error to revenue stream

Client account interest is generated when firms temporarily hold client money, most commonly in real estate and corporate transactions. Under current SRA rules, firms are required to account to clients for a "fair" sum of interest unless an alternative agreement is in place. In practice, that has left significant discretion, and a growing pile of retained income for many.

As rates climbed, so did the sums involved. In 2024, the SRA raised concerns that firms were becoming over-reliant on client account interest. A report by Crowe found that 17% of firms surveyed derived more than 10% of their revenue from it. 41% of the 57 firms polled earned more than £1 million in interest income, with the top firm taking in over £7 million.

Then came the Law Society’s 2025 financial benchmarking survey of small and mid-sized firms, which laid things bare once more. Median profit per equity partner was up sharply - but almost entirely because of interest income. Nearly all of the 21% increase in PEP came from client account interest. Strip that out, and underlying performance was flat, rising just 1.2%.

The report’s warning was blunt: firms should "wean themselves off client interest" and not view it as a sustainable growth strategy.

A political move and a fiscal one

Despite that backdrop, and reports nearly two years ago that the Ministry of Justice was looking at the issue, the government’s announcement last week still caught much of the market by surprise.

Under its proposal, the MoJ would claim 75% of interest generated on pooled client accounts and 50% from individual client accounts, with the money paid into the MoJ’s budget to "strengthen the justice system".

Legal industry consultant Adil Taha describes the move as "clumsy and rushed". And the timing also feels far from accidental, coming just months after the government quietly backtracked on plans to levy national insurance on LLP member profit drawings.

There is a clear fiscal incentive. Analysis by Taha of Companies House filings puts client account interest across the UK’s 200 largest firms at around £350 million in 2024 - enough to pull in nine figures for the MoJ if those levels were replicated when the charge comes into force.

Whether the proposal survives consultation in its current form remains to be seen. But all the signs point to client account interest being squarely in the government’s sights.

Why this is surfacing now

Taha believes the timing is driven less by interest rates and more by scrutiny of the sector more broadly. As private equity and external capital continue to circle the industry, law firm accounts are being picked apart in far greater detail than before.

"Increased investor attention has exposed just how material client account interest has become," he says. What once sat quietly below the line is now being stress-tested in valuations, financing discussions and acquisition models.

That scrutiny has already changed behaviour. Taha says that private equity buyers are now increasingly applying a zero multiple to client account interest and pushing any upside into earn-outs rather than day-one value.

In one recent deal Taha worked on, a firm reporting £5 million in profit turned out to be generating only £3.6 million from operations, with £1.4 million coming from client interest - wiping more than £11 million off its enterprise value at an 8x multiple.

When interest stops being a bonus

In some cases, client account interest is playing more than just a support role.

Taylor Rose stands out as the most striking example highlighted by Taha’s research. The firm is yet to file for 2025, but in 2024 it reported £96 million in revenue and £7.3 million in profit. That profit, however, was effectively matched pound for pound by £7.34 million of client account interest.

The firm’s accounts show "Other Operating Income" of £7.35 million in 2024 and £6.38 million in 2023 - nearly £14 million over two years - almost entirely driven by interest. Without it, the firm would have been close to break-even.

The squeeze as rates fall

There is another risk looming. Interest rates are already trending down, while law firms’ fixed costs - particularly salaries - have risen sharply over the past few years.

Taha warns that firms which have allowed interest income to prop up profits may soon feel exposed. "If that interest-driven revenue drops away," he says, "a lot of firms are going to face some hard decisions on headcount."

The problem is most acute below the top tier of the UK market. Among firms with revenues of less than £200 million, cash reserves tend to be thinner and client account interest often functions as working capital rather than surplus. In those cases, interest income is being used to boost partner drawings and smooth day-to-day cash flow.

And then there are clients

The reputational risk could prove just as significant. As the issue moves into the open, some clients are likely to take a closer look at how much interest has accrued on their money - and how much of it they have actually received.

That scrutiny could leave some firms facing awkward questions if it emerges that significant sums have been retained without clients fully appreciating the scale of what was being earned on their balances - even where the terms are set out in engagement letters.

What happens next

The MoJ launched its consultation on the Interest on Lawyers’ Client Accounts Scheme last week, with responses open until 9 February.

The Law Society has already pushed back, warning that what it described as a "raid on client accounts" would hit high street firms hardest and drive up legal fees. President Mark Evans said the proposals come at a time when firms are already under pressure from rising costs, including higher national insurance contributions and new regulatory demands around anti-money laundering supervision and tax adviser registration.

He warned that smaller firms, in particular, risk facing a "perfect storm" of new bureaucracy that could undermine the government’s wider ambitions for growth.