How should solicitors account for client interest on mixed funds?

Accounting for interest on client money is one of the areas where many solicitors feel the most uncertainty. The SRA Accounts Rules place strict obligations on how client funds are handled, yet the treatment of interest can feel surprisingly nuanced. When multiple clients’ funds sit together in a general client account, or when office and client money are briefly mixed, it is not always obvious how interest should be calculated, allocated or repaid. In my opinion, this is an area where firms often underestimate both the technical detail and the compliance risk.

This guide explains how solicitors should account for interest on mixed funds under the SRA Accounts Rules, what the SRA expects in practice, how firms can set a fair and transparent interest policy, and how to avoid common errors that can turn a simple administrative task into a regulatory issue. My aim is to give you a clear, practical understanding of how to treat interest fairly for clients while staying fully compliant.

Understanding the SRA’s approach to interest

The starting point is that solicitors must account to clients for a fair amount of interest on money held for them, unless the amount would be so small that it would be unreasonable or disproportionate to calculate and pay it over. The SRA does not prescribe a specific interest rate or calculation method. Instead, it places the responsibility on the firm to adopt a clear, reasonable and consistently applied policy.

The SRA also recognises that solicitors typically hold client funds in pooled general client accounts rather than bespoke designated accounts. Pooled accounts will inevitably generate interest that cannot be linked to each individual client’s deposit in real time. Because of this, the SRA expects firms to develop a formula or method to allocate interest fairly across clients, based on the value and duration of the funds held.

In my opinion this is where many firms misjudge the rules. The SRA does not require perfection. It requires a fair method that can be explained, evidenced and applied consistently.

What happens when client money is mixed in a pooled account?

Most firms hold the majority of client funds in a pooled general client account. When funds from different clients are mixed together, the bank pays interest only on the overall balance, not on each individual client’s share. The solicitor must therefore calculate what proportion of that interest belongs to each client.

The firm’s interest policy should explain exactly how this is done. Some firms base the calculation on the average daily balance held for each client. Others take a more practical approach and apply a flat rate that mirrors the bank’s rate or a simple proxy figure. As long as the method is fair, reasonable and consistently applied, the SRA will generally consider the firm compliant.

Where interest rates fluctuate, firms must still ensure their approach reflects a fair outcome. A policy created years ago with near-zero interest rates may be inappropriate today. In my opinion this is one of the main reasons firms should review their interest policies regularly.

Accounting for interest when office and client funds are mixed

Sometimes mixed funds arise not because different clients’ money is pooled together but because client and office money briefly pass through the same place. A good example is when a firm receives a payment that includes both client money and fees. Another example is where a firm transfers costs from the client account but later realises the amount was incorrect.

The SRA requires firms to separate client and office money promptly, but there will inevitably be short periods where mixed funds exist. If interest arises during that period, the client should only receive interest on the portion that belonged to them, and the firm should take care that office money does not artificially inflate the interest paid to clients.

In practical terms, this usually means identifying which part of a mixed transaction relates to client funds, calculating the period for which the funds were held, and allocating interest accordingly. In my opinion the key here is documentation. When interest is calculated for a mixed transaction manually, the firm should be able to show how it arrived at the figure and why it is fair.

What about rounding, de minimis interest and small balances?

The SRA acknowledges that small balances may generate trivial interest, and the cost of calculating and distributing it may outweigh the benefit to the client. The firm may therefore have a “de minimis” threshold, meaning interest is only paid over a certain amount.

There is no official threshold set by the SRA, but many firms use a figure between £20 and £50. The threshold must be reasonable, explained in the interest policy and applied consistently. It must not be used to deny clients interest that would be meaningful. This is one of the areas where the SRA may challenge firms that appear to keep small interest amounts by default.

In my experience most firms justify their threshold by demonstrating the administrative cost of calculating interest on small deposits and showing that the impact on clients is minimal.

How interest should appear in the accounting records

The firm’s accounting records should clearly show:

• the amount of client money held

• the interest earned in the pooled account

• the interest allocated to each client

• any interest transferred to the client account

• any interest retained under the firm’s policy

Although I am keeping this article non-listicle, it is worth noting briefly that the key is transparency. The SRA expects a clear audit trail that would allow an independent accountant to trace each client’s entitlement. Interest posting must be identifiable as client money and must be transferred promptly, just like any other receipt.

In my opinion firms sometimes fall down because their software is not designed for legal work or because staff are not trained in client account requirements. A legal cashier or specialist accountant can make this process far smoother.

Handling interest on designated client accounts

Sometimes a client’s funds are held in a separate designated client account, usually for large amounts held for an extended period. In that case the interest belongs entirely to that client, and the calculation is more straightforward because the bank will show interest earned directly on that account.

The firm must still document the calculation, pay the interest to the client promptly and ensure their policy explains when designated accounts are used. Some clients may request a designated account if they are depositing a substantial sum. The firm should evaluate such requests fairly.

In my opinion designated accounts are often underused because firms fear additional administrative work, yet they can offer a far more transparent interest outcome for high-value matters.

Avoiding common compliance pitfalls

The biggest mistakes I see arise when firms do not update their interest policy, fail to align their calculations with current interest rates or forget to revisit historic balances. Another risk is treating all clients the same in cases where the amounts held vary significantly. A client with hundreds of thousands of pounds held for several months deserves a meaningful interest calculation, and the SRA would expect the firm to recognise that.

Another common pitfall is accidental cross-subsidisation, where interest on one client’s funds is used to reduce another client’s liability. This can happen when calculations are not done regularly, or when the firm applies a single interest figure across all matters without considering time held and amount held.

In my opinion the best way to avoid these issues is simple: review the policy annually, ensure the method is reasonable and make sure staff understand how to apply it.

Final thoughts

Solicitors must account for client interest on mixed funds in a way that is fair, transparent and consistent with the SRA Accounts Rules. While the SRA does not dictate a specific calculation method, it does expect firms to have a clear policy, apply it consistently and maintain proper records. The goal is always to return a fair amount of interest to the client, while ensuring that the firm is not enriched by money that does not belong to it.

In my opinion firms should take interest calculations seriously, not because the sums are always large but because they reveal the quality of the firm’s systems and approach to client money. An accurate, well documented method protects both the client and the firm and shows the SRA that the firm takes its responsibilities seriously.