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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.
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…
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.
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.
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!
|Newly Qualified/Junior Lawyer
|Allen & Overy
|Slaughter and May
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 10% (Class 1). For example, If you work at Linklaters and make £50,000 a year, you’ll pay £7,486 in Income Tax and £4,995 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:
Visually, this is how Income Tax works. 👇
And for National Insurance (according to the 23/24 rates):
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 £125,140 (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 £125,140 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.
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:
In your case when you earn £50,000:
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
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
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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