How does Corporation Tax apply to solicitor firms?

Corporation Tax is the main tax paid by companies in the UK on their profits. For solicitor firms that operate as limited companies, it is a crucial part of financial compliance. Firms structured as partnerships or sole practices are instead subject to Income Tax on their profits, so the type of legal structure directly determines how tax is applied.

When solicitor firms pay Corporation Tax

A solicitor firm must pay Corporation Tax if it is registered as a limited company or a limited liability partnership (LLP) that is treated as a company for tax purposes. The tax applies to the firm’s annual profits, which include:

• Income from legal services.

• Investment income such as interest or dividends.

• Chargeable gains from selling business assets, such as property or equipment.

The standard rate of Corporation Tax is currently 25% for companies with profits over £250,000, while smaller firms earning under £50,000 pay the small profits rate of 19%. Firms earning between these thresholds pay a marginal rate that gradually increases from 19% to 25%.

How profits are calculated

Corporation Tax is based on a firm’s taxable profit, which is different from its accounting profit. To determine this, the firm starts with its net profit per the accounts and then makes tax adjustments to add back disallowable expenses and deduct allowable reliefs.

For a solicitor firm, common adjustments include:

• Disallowable expenses: Entertainment, client gifts, and fines cannot be deducted for tax purposes.

• Allowable expenses: Staff costs, professional indemnity insurance, marketing, rent, and office supplies can be claimed as deductions.

• Capital allowances: Instead of deducting the full cost of long-term assets such as computers or furniture, the firm can claim capital allowances over time.

Once these adjustments are made, the resulting figure represents the taxable profit on which Corporation Tax is calculated.

Key deadlines and filing requirements

Corporation Tax must be reported and paid annually. The main obligations for solicitor firms include:

• Registering for Corporation Tax: Within three months of starting to trade or becoming active.

• Filing a Company Tax Return (CT600): Usually due 12 months after the end of the accounting period.

• Paying Corporation Tax: Normally due nine months and one day after the end of the accounting period.

For example, if a solicitor firm’s financial year ends on 31 March 2025, the Corporation Tax payment is due by 1 January 2026, and the CT600 return must be filed by 31 March 2026.

HMRC requires all Corporation Tax returns to be submitted digitally using approved software. Late submissions or payments can result in penalties and interest charges.

How tax applies to different solicitor firm structures

Not all solicitor firms pay Corporation Tax. The applicable tax depends on the firm’s legal structure:

• Sole practitioners: Pay Income Tax on profits through the Self Assessment system.

• Traditional partnerships: Each partner pays Income Tax on their share of profits.

• Limited Liability Partnerships (LLPs): Normally taxed like partnerships, unless they elect or are treated as companies.

• Limited companies: Pay Corporation Tax on total profits, and directors pay additional Income Tax on salaries or dividends.

Incorporating a law firm can bring tax planning opportunities, but it also adds administrative responsibilities. Accountants can help solicitors assess whether a corporate structure is financially advantageous compared with operating as a partnership.

Special considerations for solicitor firms

Solicitor firms face unique financial and regulatory conditions that affect how Corporation Tax is managed.

1. Client account interest

Interest earned on client money held in designated deposit accounts belongs to clients and is not taxable to the firm. However, interest earned on pooled client accounts, if retained by the firm, may be subject to Corporation Tax. Accountants ensure that only the firm’s portion of interest income is included in taxable profits.

2. Professional indemnity and compliance costs

Professional indemnity insurance and compliance-related costs, including SRA fees and external audits, are fully deductible for Corporation Tax. These are considered necessary business expenses.

3. Disbursements and client costs

Money collected from clients to cover disbursements, such as court fees or expert reports, is not treated as income and should be excluded from taxable turnover. Only the firm’s own fees and recoverable expenses count as taxable income.

4. Staff bonuses and partner drawings

Employee salaries and bonuses are allowable deductions, but partners’ drawings in a partnership are not. In a limited company, directors’ salaries are deductible, while dividends are not. Structuring remuneration efficiently helps reduce Corporation Tax liability while keeping the firm compliant.

5. Use of company assets

If the firm owns vehicles, equipment, or other assets used personally by directors, a benefit in kind may arise. Accountants calculate and report these benefits correctly through PAYE and the firm’s tax return to avoid penalties.

Corporation Tax and Making Tax Digital

Although Making Tax Digital (MTD) currently applies mainly to VAT, it will eventually extend to Corporation Tax. This means solicitor firms will need to maintain digital records of all transactions and submit tax data directly through compatible software.

Accountants are already helping firms prepare for this change by:

• Introducing digital accounting systems.

• Ensuring accurate record keeping for VAT and income.

• Aligning financial processes with HMRC’s digital reporting requirements.

Firms that embrace digital accounting early will find the transition to digital Corporation Tax filing much smoother when it becomes mandatory.

How accountants help solicitor firms manage Corporation Tax

Accountants play a vital role in helping solicitors manage Corporation Tax efficiently. Their support includes:

• Preparing and submitting annual tax returns (CT600).

• Ensuring all allowable expenses and reliefs are claimed.

• Advising on tax-efficient remuneration for directors and shareholders.

• Managing quarterly instalment payments for large firms.

• Providing year-round tax planning to minimise liability.

• Ensuring compliance with both HMRC and SRA financial rules.

They also help firms forecast Corporation Tax liabilities so that cash flow is managed effectively throughout the year.

Example in practice

A solicitor firm incorporated in 2022 earned £400,000 profit after expenses. Its accountant calculated a Corporation Tax bill of £100,000 at the 25% rate. By identifying £30,000 in qualifying capital allowances for IT equipment and office fit-outs, the accountant reduced the taxable profit to £370,000, lowering the tax bill to £92,500.

Without professional input, the firm might have missed these reliefs and overpaid tax.

Tax planning opportunities for solicitor firms

Proactive tax planning can make a substantial difference to a firm’s profitability. Strategies include:

• Timing capital expenditure to maximise annual investment allowance (AIA).

• Making pension contributions for directors.

• Structuring dividends and salaries efficiently.

• Reviewing whether an LLP or limited company structure offers better tax outcomes.

Accountants specialising in legal sector finance can tailor these strategies to the firm’s goals while maintaining compliance with SRA and HMRC.

Conclusion

Corporation Tax applies to solicitor firms operating as limited companies and covers all profits after allowable expenses. Understanding the tax rules and deadlines is crucial for compliance and effective financial management.

With the guidance of an experienced accountant, solicitor firms can calculate Corporation Tax correctly, optimise deductions, and plan strategically for future growth. By staying proactive and compliant, firms can reduce tax risk and focus on delivering high-quality legal services with confidence.