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Pay wars – magic circle salaries and what it means for tax

  • 4 min read
  • 4 Jul 2022
Magic circle law firms tax

If someone told you that you could get a job post-graduation that’d give you a £100k+ a year salary, you’d probably think they were either: 

  1. Joking
  2. Trying to scam you 

Well if you’re planning on becoming a lawyer at one of the UK’s famous magic circle law firms, £107,500 is the minimum you can expect to earn once you’re newly qualified. It sounds crazy doesn’t it, almost too good to be true? 

Yes it does… 🤑

The reality is that starting salaries like this are the new norm for many newly qualified (NQ) graduates on the hunt for their first job within the magic circle. But what has caused this prestigious group of law firms to bump up the pay packets of some of the most junior members of their teams? 

And with all this money, what does this mean for the tax obligations of the NQ lawyers?

We’ll answer all in the blog below…

So what’s happening with magic circle starting salaries?

Lawyers are now some of the best-paid graduates in the country. Why? Well, it’s mostly down to a type of ‘pay war’. It’s taking place among some of the top law firms in the world. 

The legal industry has found itself caught up in an intense hunt for new talent . This is thanks to a huge industry boom following the Covid-19 pandemic and Brexit. To put it simply, there’s too much work, and not enough lawyers to do it. Combined with the fact that many senior associates at magic circle law firms have left, this has led to a surge in the number of junior lawyers being recruited to help with additional support.

Why the boom?

Of course, we all know that being a lawyer is a tough job. But the problem is that the industry is seeing increased workloads and hours, which is resulting in burnout among lawyers. Law firms, like those in the magic circle, have responded by offering double-digit pay rises and office perks in an effort to retain their employees. 

Flashy offices, onsite doctors and dentists, as well as post-work meals cooked by chefs, are also being used to ‘reward’ the junior lawyers for their gruelling work. This  can involve working 12 hours, 7 days a week (yikes!). But in doing so, these law firms have sparked a pay war amongst the rival firms. 

Pay wars

For example, Allen & Overy last year announced that they were matching magic circle rival Linklaters by offering their NQ lawyers a £107.5k starting salary. Not to mention that they also increased their trainee salaries to £50,000 in year one and £55,000 in year two, from ​​£47,500 and £53,000, respectively.

The average starting salaries for NQ Lawyers in the magic circle

Law FirmFirst-Year TraineeSecond-Year TraineeNewly Qualified/Junior Lawyer
Allen & Overy£50,000£55,000£107,500
Clifford Chance£50,000£55,000£125,000
Freshfields£50,000£55,000£125,000
Linklaters£50,000£55,000£107,500
Slaughter and May£50,000£50,000£115,000

What does this mean for tax?

At a first glance these huge wages sound great to newly qualified lawyers. But what many of them often forget about is tax. With a higher salary, comes higher taxes, and more obligations to keep track of. 

If you’re a NQ lawyer with a hectic schedule, you might be struggling to wrap your head around (or simply forget) the tax you owe. If you work at a magic circle firm, then the most important thing to remember is that the amount of tax you’ll pay will change once you go from being a first/second-year trainee to newly qualified. 

The tax breakdown

This is because once you earn over £100,000, your Personal Allowance is reduced. It’s by £1 for every £2 over £100,000 as you are classed as a high earner. 

If you work at either Clifford Chance or Freshfield and earn £125,000+ a year, then your Personal Allowance drops to £0. Meaning that your income between £100,000 and £125,000 will be taxed at 60% – and this doesn’t include National Insurance, that’s another 3.25% on top.

If you want to know the exact amount of tax you can expect to pay on a magic circle starting salary, use our handy income tax calculator below!

Your situation

Outlined number oneOutlined number one
I am
Annual self-employed income
Self-employed expenses
?

Tax and profit

Outlined number two
  • Total earnings
    £50,000
    £1,000 tax-free Trading Allowance
    ?
  • Tax to pay
    £10,994
    £7,286 income tax
    £159 class 2 National Insurance
    £3,549 class 4 National Insurance
  • What you’re left with
    £39,006

How your income tax is calculated

When you’re self-employed, you have to pay your income tax and national insurance contributions yourself in your annual Self Assessment. Our calculator helps you quickly assess how much you owe.

However you may be eligible for a tax refund when:

  1. You already made tax payments for the year but your annual income ended up less than planned
  2. You have done things that qualify for a tax relief (made private pension contributions, given to charity, etc.)

In your case when you earn £50,000:

Income tax breakdown

You pay no income tax on first £12,570 that you make

You pay £7,286 at basic income tax rate (20%) on the next £36,430

National insurance contributions breakdown

No contributions on the first £9,568 that you make

You pay £3,549 in contributions (at 9%) on the next £39,432 that you make

You pay £159 in NI Class 2 contributions

Do trainee magic circle hopefuls run the risk of becoming HENRYs?

Yes! Like anyone who is working in a high-earning job, junior lawyers can quite easily be classed as a ‘HENRY’ (High Earner Not Rich Yet). 

Starting salaries in magic circle law firms are very lucrative, but if NQ lawyers also have high-income costs to pay (tax, bills, and personal finances), they might struggle to put any of their wealth into savings for the long term. 

How to make sure you’re paying the right amount of tax

Paying tax as a high earner might sound pretty daunting, especially if you’re on a magic circle starting salary, but it doesn’t have to be complicated at all! If you have a tax-based problem, get in touch with us for some simple, one-off tax advice from our accredited accountants. Learn more here.

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