The £100m ‘Stealth Tax’ Raid on Law Firms | DISABLED ENTREPRENEUR

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Disclaimer: This article is for general information, commentary and educational purposes only and does not constitute legal, financial, tax or professional advice. The term “stealth tax” is used because it has been used by representatives of the legal profession and in media reporting to describe the proposed Interest on Lawyers’ Client Accounts (ILCA) scheme; it should not be interpreted as a legal determination that the proposal constitutes a tax. At the time of writing, the ILCA scheme remains a developing government policy rather than an established charge already operating across England and Wales. The Ministry of Justice consultation closed on 9 March 2026, and subsequent reporting in August 2026 indicates that the Government is continuing work on implementation. Readers should consult official government publications for the latest position.

A £100 Million Raid on Client Account Interest Could Change the Economics of High Street Legal Services

What Is the ILCA Scheme and Why Are Lawyers Being Targeted?

Prime Minister Andy Burnham’s Government is reportedly pressing ahead with controversial proposals expected to raise around £100 million by taking a substantial share of the interest generated on money held in lawyers’ client accounts.

The proposal is known as the Interest on Lawyers’ Client Accounts Scheme, or ILCA.

It was originally developed within the Ministry of Justice before Burnham became Prime Minister, but recent reporting suggests that the new administration intends to continue the project. A Ministry of Justice recruitment exercise seeking officials to help take the policy from primary legislation through to implementation has been interpreted by the legal profession as evidence that the scheme remains very much alive.

The Law Society of England and Wales has strongly opposed the proposals, describing them as fundamentally flawed and arguing that they amount to a sector-specific charge on clients of legal services.

But what exactly is the Government proposing, where does this money come from, and why have law firms been selected?

What Is the Interest on Lawyers’ Client Accounts Scheme?

Law firms regularly need to hold money belonging to their clients.

This is completely separate from the firm’s own business money.

Examples include:

Money being transferred during the purchase or sale of a property;
Funds forming part of a deceased person’s estate during probate;
Settlement money following litigation;
Damages awarded to an injured person;
Deposits and completion funds;
Money held as security for legal costs; and
Funds temporarily held while a legal transaction is completed.

These sums are placed in specially controlled client accounts and must be kept separate from the firm’s ordinary office account.

Because potentially substantial amounts of money can sit in these accounts, even for relatively short periods, banks may pay interest on the balances.

The Ministry of Justice explains that solicitors and licensed conveyancers frequently hold substantial client funds during conveyancing, probate and litigation and that these accounts can consequently generate interest.

The proposed ILCA scheme would give the Government a statutory right to take a proportion of that interest.

How Much Would the Government Take?

Under the proposal published for consultation, the Government suggested taking:

75% of the interest generated on pooled client accounts, and

50% of the interest generated on individual client accounts.

The Government even consulted on whether the proportion taken from pooled accounts should potentially be as high as 90% or 100%.

A pooled account is where money belonging to numerous clients is held together within one regulated client account.

An individual client account is generally established separately for a particular client, often where larger sums may be held for longer periods.

The Government says taking a smaller proportion from individual accounts recognises that these can involve larger deposits, higher administrative costs and clients who might reasonably expect to receive meaningful interest themselves.

A Simple Example

Imagine a conveyancing firm temporarily holds completion money belonging to dozens of homebuyers and sellers.

Over the course of the year, those funds generate £100,000 in bank interest.

Under a simplified version of the proposed 75% model:

£75,000 could go to the Government;
£25,000 would remain;
The firm would then still have to comply with regulatory rules concerning what proportion of the remaining interest should be paid to clients.

This is important because the underlying capital does not belong to the law firm.

It belongs to its clients.

The argument is therefore not simply about taking some of a solicitor’s profits. It concerns who should benefit from interest generated while client money is temporarily under professional control.

Why Is the Government Targeting Law Firms?

There are several reasons behind the proposal.

1. Law firms collectively hold very large amounts of client money

Property transactions, probate, litigation and corporate work mean that substantial sums regularly pass through legal client accounts.

Those balances can generate sizeable amounts of interest.

From the Government’s perspective, this creates an identifiable source of revenue connected directly with the justice system.

2. The Ministry of Justice needs additional funding

The Ministry of Justice is responsible for courts and tribunals, prisons, probation and legal aid.

The Government says money generated through ILCA would “help strengthen the justice system” and could be directed towards areas where funding was most needed.

Crucially, however, the Government’s proposal does not currently guarantee that the money will be ring-fenced specifically for legal aid or access-to-justice projects.

Instead, it could become part of the wider Ministry of Justice budget.

This is one of the major differences between the Government’s proposal and some international schemes.

3. Similar schemes operate overseas

The Government has pointed towards schemes operating in jurisdictions including the United States, Canada, Australia and France.

In several of those countries, interest generated from legal client accounts is directed towards public-interest purposes.

For example, schemes may finance:

Legal aid;
Pro bono legal services;
Legal education;
Law reform;
Legal research; and
Community legal programmes.

The Government argues that this demonstrates that client-account interest schemes can operate successfully.

Critics point out, however, that the proposed British model is different because the money would initially flow into the Ministry of Justice’s wider budget rather than being exclusively protected for clearly defined access-to-justice programmes.

4. Government research suggested most firms were not dependent upon the interest

The Ministry of Justice commissioned research involving 604 legal-service providers.

According to the consultation document, 92% of providers surveyed said they were not reliant upon client-account interest for the sustainability of their business, while 94% said losing the interest would have little or no impact on their firm.

The Law Society strongly disputes whether that research accurately represents the economic realities faced by firms across the profession.

Its own analysis warns that high street practices, legal-aid providers, conveyancing firms and smaller practices may be particularly vulnerable.

Why Is It Being Called a “Stealth Tax”?

The phrase has largely come from critics within the legal profession rather than being the Government’s terminology.

Their concern is straightforward.

If the government wants to raise public revenue, Parliament traditionally does so through recognisable mechanisms such as:

Income tax;
corporation tax;
VAT;
National Insurance;
Capital gains tax; or
Other clearly defined statutory taxes.

ILCA is different.

Instead of announcing a conventional new tax on legal businesses or the general public, the Government proposes to divert a percentage of interest generated through a very specific type of financial arrangement.

The Law Society argues that the proposal consequently resembles a sector-specific tax on clients of legal services.

That is why critics use the expression “stealth tax”.

Whether ILCA would technically and legally constitute a tax, levy or another form of statutory payment is a separate legal question.

Are Law Firms Really Keeping All of Their Clients’ Interest?

Not necessarily.

This is an important distinction.

Under existing Solicitors Regulation Authority rules, firms generally have obligations concerning the payment of a fair sum of interest to clients.

Different arrangements may also be agreed with clients depending upon the circumstances.

The Government’s consultation acknowledges that regulatory rules already determine how client interest should be treated.

The Ministry of Justice research found that some firms return all interest, others return part of it, while some use elements of client-account interest to meet banking and administrative costs.

Therefore, describing all client-account interest simply as additional law-firm profit would be misleading.

Why Could Conveyancing Firms Be Particularly Affected?

Property transactions involve very large sums.

A solicitor may temporarily hold hundreds of thousands of pounds relating to a single house purchase.

Multiply this across hundreds or thousands of transactions and the total client-account balance can become enormous.

Although each sum may only remain in the account briefly, collectively the interest generated can make a meaningful contribution towards the costs of operating a conveyancing practice.

Recent reporting suggests property-law firms could therefore be among those particularly exposed to the change.

If that income disappears while operating costs remain unchanged, firms have limited choices.

They could:

Absorb the cost;
Reduce staff;
Reduce investment;
Withdraw from less profitable areas of law; or
Increase fees charged to clients.

This creates the possibility that consumers could ultimately pay for the Government’s policy through higher legal bills.

Could Clients End Up Paying More?

That is one of the Law Society’s central warnings.

Client accounts are not cost-free.

Law firms incur expenses associated with:

Banking facilities;
Administration;
Reconciliation;
Compliance;
Cybersecurity;
Professional indemnity insurance;
Anti-money laundering checks;
Regulatory reporting; and
Specialist accounting systems.

Interest income may currently help some businesses absorb these costs.

If the Government removes most of that income, the costs do not disappear.

They may simply be transferred elsewhere.

The Law Society therefore warns that fees could rise and some firms could close if the proposal proceeds.

What About Legal Aid Firms?

This may be an even greater concern.

Many firms carrying out legal-aid work already operate under intense financial pressure.

Unlike purely private practices, they cannot always simply raise their prices to compensate for increased costs.

The Law Society argues that ILCA could make some legal-aid services economically unviable, potentially encouraging firms either to leave legal aid altogether or close.

That could worsen existing legal-aid deserts, where individuals already struggle to find local solicitors willing or able to take publicly funded cases.

Ironically, a policy intended to raise money for the justice system could therefore risk making access to legal representation more difficult.

What About Damages Awarded to Injured or Vulnerable People?

Another controversial element is the proposal to include certain individual client accounts.

These accounts can contain substantial damages awarded to people who have experienced catastrophic injuries or other serious losses.

If a large award remains in a solicitor-controlled account while arrangements are completed, it may generate significant interest.

Under the Government’s proposed model, 50% of that interest could potentially be diverted to the scheme.

The Law Society has warned that this could leave some vulnerable clients receiving less interest on compensation that was awarded specifically to meet their future needs.

That raises important questions about proportionality and fairness.

Why Not Fund the Justice System Through General Taxation?

This lies at the heart of the disagreement.

Few would dispute that Britain’s courts, legal-aid system, prisons, probation services and wider justice infrastructure require sustainable funding.

The disagreement concerns who should pay.

The Government sees client-account interest as an additional source of revenue already connected to the legal system.

The Law Society’s position is that justice is a fundamental public service and should therefore be financed through general taxation rather than through the appropriation of interest connected with clients’ money.

It also points out that the legal profession already contributes substantial amounts through business taxes, income tax, National Insurance, business rates and court fees.

According to Law Society figures, the UK legal-services sector contributed an estimated £15 billion in tax in 2023, while HM Courts and Tribunals Service collected more than £830 million in fees during 2024/25, much of it from solicitors and their clients.

This raises a legitimate policy question:

At what point does asking one sector to finance the public system within which it operates become disproportionate?

Are Lawyers Being Targeted Because They Have Done Something Wrong?

No evidence suggests the policy exists because the Government believes law firms generally have done anything improper.

This is a revenue-raising policy, not a punishment or enforcement measure against solicitors.

Law firms appear to have been selected because they occupy a unique position: regulated legal businesses routinely hold large amounts of third-party money capable of generating interest.

That makes client accounts an identifiable financial pool from which the Government believes money could be redirected towards the justice budget.

Critics would answer that this is precisely the problem.

The fact that a source of money is identifiable does not necessarily establish that the Government has a fair or principled claim to it.

Could This Set a Precedent?

Potentially.

One question extending beyond the legal profession is whether governments should be able to identify income generated incidentally within a regulated profession and redirect a large percentage of it towards public spending.

If ILCA is established successfully, other industries may understandably ask whether similar sector-specific revenue mechanisms could eventually be created elsewhere.

For this reason, the debate is about considerably more than solicitors’ bank accounts.

It touches upon:

Taxation;
Property rights;
Client ownership of money;
Government funding;
Professional independence;
Access to justice; and
The relationship between regulated professions and the state.

The £100 Million Question: Who Ultimately Pays?

There is an old economic principle worth remembering whenever governments introduce a new business cost:

Businesses do not operate in a vacuum.

Costs ultimately have to be absorbed somewhere.

If law firms lose income but their expenditure remains unchanged, the financial impact may eventually appear through:

Higher legal fees;
Reduced staffing;
Fewer trainee positions;
Reduced pro bono work;
Fewer firms offering legal aid;
Reduced investment in technology and cybersecurity; or
Practice closures.

Clients may therefore become the indirect taxpayers even if the charge technically falls elsewhere.

The Law Society has also warned that the proposals could damage high street firms and access to justice.

A Policy That Deserves Proper Scrutiny

The Government has every right to examine new ways of funding an overstretched justice system.

International precedent also means the basic concept of using interest from lawyers’ client accounts is not unprecedented.

But precedent alone does not prove that every version of such a scheme is fair.

There is a particularly significant difference between using client-account interest exclusively to finance legal aid and access-to-justice projects and absorbing that money into a department’s general budget.

There must also be transparency about exactly:

How much revenue ILCA would genuinely raise;
What it would cost to administer;
Whether consumers would face higher fees;
Whether legal-aid providers would close;
how vulnerable clients would be protected;
Whether client confidentiality could be affected;
What safeguards would prevent future increases to the percentage taken; and
Whether the Government could obtain the same funding more fairly through general taxation.

The justice system desperately needs investment.

But access to justice should not be improved in one area by inadvertently making legal advice less affordable in another.

If a £100 million funding gap exists, Parliament should be prepared to debate openly how that money should be raised and who should bear the burden.

Calling a charge something other than a conventional tax does not make its economic consequences disappear.

And when the money being targeted originates from funds held on behalf of ordinary people buying homes, administering estates, resolving disputes or receiving compensation, those consequences deserve particularly careful scrutiny.

Conclusion

The proposed Interest on Lawyers’ Client Accounts Scheme represents a significant change in the relationship between government, the legal profession and clients’ money.

Under the consultation model, the Government could receive 75% of interest from pooled client accounts and 50% from individual client accounts, creating a new source of Ministry of Justice revenue.

The Government argues that this could strengthen the justice system and points to comparable schemes operating internationally.

The Law Society argues instead that it is a poorly evidenced, sector-specific raid on client money that could increase fees, weaken smaller firms and damage access to justice.

Both propositions should be examined on evidence rather than slogans.

However, one fundamental principle should remain at the centre of the debate:

A properly functioning justice system benefits the whole of society. The question Parliament must answer is whether funding that system through a compulsory deduction from interest generated on legal clients’ money is genuinely fairer than funding it transparently through the wider taxation system.