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Why is tax important for magic circle hopefuls?

  • 4 min read
  • Last updated 28 Jul 2022

Are you planning on becoming the next Harvey Specter? 

If so, then you probably already know how fast-paced and lucrative the life of a lawyer can be. But it’s even more hectic if you’re both non-fictitious 😆 and want to work for one of the famous and highly regarded ‘magic circle’ law firms.

Between the fancy suits, post-work drinks and legal jargon, there’s one very important thing that many magic circle hopefuls forget to think about.

Tax.

Yes, unfortunately being a well-paid UK lawyer won’t stop you from escaping the world of taxes. Knowing how much and what tax you need to pay is vital when you’re in a high-earning role. Why? 

We’ll explain everything below…

What is the ‘magic circle?’

Well, for starters, the magic circle has nothing to do with actual magic – sorry to disappoint!

Instead, the term actually refers to five of the biggest commercial law firms that are headquartered in the UK. Not only are these law firms some of the most prestigious in the world (let alone the UK), but they also guarantee some of the highest salaries and earnings for both the partners and lawyers who work for them. 

But the big paycheck doesn’t come without work – lawyers who work at a magic circle firm are required to deal with high-pressure and fast-paced working environments, as well as very long hours each day.

Which law firms are in the magic circle?

The five magic circle law firms are:

All of them are based in London, and their prestigious status within commercial law comes from various factors, such as the number of employees they have working for them, their client base, and the revenue (money) they make per lawyer/per partner.

What is the average starting salary at a magic circle law firm?

It’s no secret that UK lawyers make a lot of money, but if you work at one of the magic circle law firms, it’s safe to say that you’ll be in one of the best-paid jobs in the country.

If you’re thinking of working at a magic circle firm, it’s important to know how much you’ll be paid so that you can work out what tax obligations you’ll have. Just because you’re making a lot of money doesn’t mean you can’t budget and plan ahead!

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

Magic circle lawyers and tax

So why is tax so important to know if you’re a magic circle hopeful? The most vital thing to know is the difference in the amount of tax you’ll pay when you transition from a first-year trainee to a second-year trainee to a newly qualified lawyer.

As a first-year trainee, you will pay Income Tax at the basic income tax rate (20%) and National Insurance (NI) contributions at 13.25% (Class 1). For example, If you work at Linklaters and make £50,000 a year, you’ll pay £7,486 in Income Tax and £4,959 in National Insurance.

But when you become a second-year trainee, you’ll have to start paying a higher tax rate on part of your £55,000 salary. Here’s a breakdown of your Income Tax:

  • You pay no income tax on the first £12,570 that you make
  • You pay £7,540 at a basic income tax rate (20%) on the next £37,700
  • You pay £1,892 at a higher income tax rate (40%) on the next £4,730
  • The total amount of Income Tax you’d pay is £9,432. 

Visually, this is how Income Tax works. 👇

TaxScouts uk income tax rates

And for National Insurance:

  • No contributions on the first £12,570 that you make
  • You pay £4,995 in contributions (at 13.25%) on the next £37,700 that you make
  • You pay £154 in contributions (at 3.25%) on the remainder of your income
  • The total amount of NI you’d pay is £5,149

What do newly qualified (NQ) Magic Circle Lawyers pay in tax?

What you need to know about tax changes once again when you become a newly qualified lawyer. 

Once you earn over £100,000, your Personal Allowance is reduced by £1 for every £2 over £100,000 as you are classed as a high earner. And if you earn over £125,000 (like those at Clifford Chance or Freshfield), your Personal Allowance goes to £0. 

This means that your tax rate for the income between £100,000 and £125,000 is 60%.

HMRC also requires anyone earning over £100,000 to fill in a self assessment tax return so that they can keep an eye on you and check you’re paying your fair share of tax! Be sure to check out our tax calculators to see how much tax you’ll need to pay as a magic circle lawyer here.

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

Still confused?

If the world of tax is more terrifying to you than entering a courtroom, then don’t worry! We’re here to tell you that it really doesn’t have to be that complicated. 
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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