Protecting your financial future

Finding time in today’s busy world is a constant challenge.  The demands of balancing work, family and leisure often do not allow the opportunity to plan or review personal finances.

There are three key areas that will help protect you and your family:

  • Income replacement cover
  • Critical illness cover
  • Life assurance

Income replacement cover

Income replacement is a means of providing a tax- free income where, due to ill health (caused through accident or sickness), you are prevented from working for a number of months or even years. 

Such plans generally provide cover between 50%-60% of your total gross earnings, less trading expenses, and will cover you being unable to carry on your own occupation. (This is preferable to policies that may not pay out if you can carry on any occupation.) A proportionate level of benefit may also be payable if you return to work part-time, assuming the reduction in earnings is because of your illness or injury.

After an agreed ‘deferred period’ of usually between four and 52 weeks when no benefit is payable – the length of which will determine the cost of the policy – income replacement cover will pay out an amount each month until you are able to return to work, the policy cessation date or you die.

All benefits payable at the point of claim are dependent on a range of factors, such as any continuing income and potential State benefits.

Critical illness cover

If you are diagnosed with a critical illness it could have a significant effect on your finances.  Critical illness cover is an insurance policy that pays out a tax- free lump sum on the diagnosis of an illness as specified in the policy conditions. 

These policies usually cover up to 30 different conditions, each of which may have a different impact on the claimant.  There are seven core medical conditions which must conform to minimum definitive guidelines set out by the Association of British Insurers (ABI).  These are cancer, coronary by-pass surgery, heart attack, kidney failure, major organ transplant and Multiple Sclerosis.

A financial need will be directly related to the condition suffered so an exact requirement cannot be calculated until after the event.  However, a reasonable level of cover would consist of protection for the mortgage or loan; paying for long-term nursing care or medical expenses; or paying for alterations to your home or car.

Life assurance

A life assurance policy is a simple, affordable and effective way of protecting your family’s future by providing the peace of mind of knowing that if you die, your family will receive a tax free lump sum or income.  The most typical forms of life assurance policy available are set out below:

  • A Mortgage Protection Policy is designed to repay a capital and interest mortgage in the event of death.
  • A Level Term Assurance Policy is designed to repay an interest-only mortgage or as protection for the existing family lifestyle.
  • Family Income Benefit is designed to provide cover for a temporary need such as childcare or education costs. The policy would usually pay out a tax free annual income over the term of the plan.
  • A Whole Life Assurance Plan is designed to pay out a lump sum in the event of death and is not restricted by a designated policy term. This is also the only form of life assurance that has an investment element built in to the contract.

Premium rates for term assurance policies can be offered on a guaranteed or reviewed-rate basis with the option to inflation link the policy annually also being available.  For whole life policies, premiums are usually guaranteed for ten years and would then be subject to review depending on the investment performance of the fund/s selected.

The Barristers Benevolent Association

If you are struggling with financial pressures you might consider contacting the Barristers Benevolent Association (BBA). It is also possible to donate to the BBA.

If the donation is gift-aided, a self-employed barrister who pays higher or additional rate tax will be able to claim the difference between the rate they pay and the basic rate of tax on the donation.  https://www.gov.uk/donating-to-charity/overview.

This page was drafted in partnership with MPL Wealth ManagementFor more information about the information above, please contact Giles Garlick, Chartered Financial Planner on 020 7831 4711 or gg@mplltd.co.uk

State benefits and tax credits for the self-employed

If you really hit hard times you might be able to claim some state help towards housing and living costs. The rules are complicated. A good place to start is the Turn2Us website, which enables you relatively quickly to assess your benefit entitlement.

If that doesn’t answer your questions, or you wish to speak to someone in more detail, contact Citizens Advice. There is a wealth of information, including specific guidance on benefits, on the Citizens Advice website.

ABSs and entities: dual-practice – employment as a consultant

There is now an increasing variety of ways in which barristers can offer their services. These will have their own accounting and tax treatment. It is important to double check with an accountant that you are dealing with your fees in an appropriate way.

Do be aware that you may be considered to be an “employed barrister” for the purpose of BSB regulation, but your income may fall to be taxed as arising from “self-employment: the definition of ’employed barrister’ includes a practising barrister who is employed “under a written contract for services which is for an indeterminate period…….” 

Fees from employment as a consultant will typically be treated in the same way as any of the other fees that you receive. The difference is that they will most likely be paid to you directly rather than through Chambers. It is up to you to ensure that you issue the appropriate invoices, receipts and admittance advices to your client. The fees will be part of your taxable income.

Guidance on the taxation of income derived from work done or through entities is currently under consideration by the Bar Council’s Taxation Panel and will be published later this year.

The BSB has not yet begun to authorise non-lawyer entities (‘Alternative Business Structures’).

Sole practitioners

You cannot set up completely on your own if you are a barrister of less than three years’ standing. The BSB Handbook rS20 requires that your principal place of practice must be a chambers, or chambers annex, which is also the principal place of practice of a ‘qualified person’ who is able to provide you with guidance, or an office where there is someone of the requisite experience. For details see the BSB Handbook, rules S20, 21 and related guidance.

If you later become a sole practitioner you will be solely responsible for the running of a chambers and all the regulatory requirements which that entails, including ensuring that your practice is efficiently and properly administered (see BSB Handbook rC87.1 and rC89). Note that a sole practitioner is a chambers within the BSB definition.

Serious consideration should be given to the decision to become a sole practitioner. This may be isolating and you may lack support and there may be difficulties with work which has to be returned.

NB: it is not a regulatory requirement for you to have a clerk. However you will need to decide whether you can run your practice in accordance with the BSB Handbook without administrative support.

It is essential that you are able to do the following (at least):

  • Log briefs on arrival.
  • Have facilities to ensure that your work is completed in good time and that you do not take on more work than you can manage.
  • Have suitable diary facilities to avoid clashes.
  • Keep adequate records of your work, see BSB Handbook rC87.2 and guidance at gC132.
  • Send out fee notes in good time and keep adequate records of fees: see BSB Handbook rC88.
  • Comply with the BSB Handbook e.g. providing clients with terms of business (see rC22 and rC23) and complaints procedure (see section 5A), conflicts procedure and appropriate confidentiality procedures (rC89.5 and gC134)and having a Equality and Diversity policy, appropriate risk management procedures (rC89.8) and changes in regulatory matters from time to time and liaising with the BSB (rC89.2).

On the plus side, you are permitted to negotiate your own fees, to practise from your own home (although the BSB does have a right to inspect the place where you practise: see BSB Handbook, you do not need to have a name plate on the door and you can hold conferences wherever is convenient.

BARCO

You are not entitled to handle client money (see the BSB Handbook rC73).

You can however use a third party payment service under rC74.  BARCO is the body which has been established by the Bar Council for this purpose.  This service is likely to be particularly important for you if you are working on a Public Access basis.

In order for BARCO to accept payments all the parties must have signed the standard BARCO Framework Agreement.

The person who pays for this service is the barrister (the charge is approximately 2% of funds transferred).

All the interest paid whilst the money is in BARCO is paid to the client.

See also:

http://www.barcouncil.org.uk/supporting-the-bar/barco/

http://www.barcouncil.org.uk/media/309604/guidance_for_barristers.pdf

Professional insurance: the BMIF and regulatory requirements

  • There is a regulatory requirement for you to have adequate insurance (taking into account the nature of your practice): see rule C76(1) of the BSB Handbook. There is guidance at gC114 but it does not really elucidate what is meant by “adequate”.
  • You must obtain insurance from the BMIF in order to practice (rule C77 of the BSB Handbook) so you should be in touch with the BMIF in order to obtain insurance immediately on starting practice.
  • Early in the calendar year each year the BMIF will send round returns to complete. It is very important that these are accurate as inaccuracy could cause your insurance to be invalidated.  The returns require you to categorise your income from the previous year.  If you are in serious doubt as to the correct category for a case the BMIF can advise.   The insurance runs from 1 April to 31 March every year.  You are required to pay the BMIF promptly and to provide the BMIF with the information it requires: see rule C78 of the BSB Handbook.
  • The amount you pay to the BMIF is worked out as a combination of your risk profile from the work you do and the amount you earned in the previous year.
  • You must have minimum cover of £500,000. The maximum you can obtain from BMIF is £2,500,000. The BMIF will tell you if the amount which you are required to pay entitles you to a level of insurance higher than £500,000 up to £2,500,000.
  • Insurance is available in excess of £2,500,000 from private insurance companies and a quote can be requested when you fill out your BMIF return. The Bar Council has service partners who may offer advantageous terms. It is surprisingly inexpensive, particularly when you take into account that it is tax deductible.
  • It may seem improbable that you will be involved in such high value cases in your early years of practice, but do be careful to keep an eye on your potential liability in any given case. You can easily find yourself involved as a junior in cases with surprisingly large financial implications.
  • Top up insurance can also cover you for matters not covered by BMIF, e.g. fines in respect of data protection failures. (Data protection fines can be substantial: we have heard of six figure sums being ordered in cases where DP rules have been breached, and fines can be imposed, for example, for having medical records stolen from a locked house or the boot of a car).
  • You may wish to increase your insurance in order to cover yourself for a particular case. This can be done mid-year. Your chambers may have negotiated a collective discount for private insurance.

If you have been notified of a claim, even informally, notify the BMIF straight awayDO NOT bury your head in the sand.  This could lead to a position where the insurance is invalidated. Being notified of a claim does not mean that you have been negligent and even the best barristers make mistakes.  The claims handlers are sympathetic.  It is likely that senior members of chambers will be willing to offer you support and some will even share their mistakes with you too. 

Tax and national insurance

There is extensive guidance on all aspects of tax, capital allowances, the treatment of Chambers’ expenses, VAT and pensions, including a section specifically providing advice to pupils and barristers starting practice, in the Bar Council’s Taxation and Retirement Benefits Guidance.

The following are some key points to bear in mind. Always take full advice, or conduct your own research with the help of the Taxation Handbook (see link above).

  • It is important to register with HMRC as soon as you start practising (i.e. as soon as you are on your feet – or sitting at your desk – generating fees).
  • To fill in a tax return, you need to register with HMRC. You can then fill in a paper return or an online return as you choose. HMRC will calculate what you owe and will send you the bill. Barristers pay tax in two instalments; the first in January, the second in July.
  • As a self-employed practitioner your tax is paid on account in advance of the next year. This means that your first bill will be made up of your tax for the previous year, and also half of that again on account. The second payment on account of half again then falls due in July.
  • From the tax year 2013/14 onwards you may elect to be taxed on either a cash basis or an earnings basis. If you are taxed on a cash basis, you will be taxed on cash received in the relevant tax year. Before you choose the cash basis read the HMRC guidance to confirm your eligibility to use it: there are amongst other things entry and exit thresholds based on the level of receipts. If you are taxed on an earnings basis your taxable profits will be the profits earned in the relevant tax year, not cash actually received. There are different, detailed rules associated with each basis of taxation: see paragraphs 36-42 of the Taxation Handbook.
  • Bear in mind that you have the option of making your first six award tax free. See Study Loans and Pupillage Awards. See the Study Loans and Pupillage Awards page of the Toolkit.

When you start receiving income, we recommend setting up a separate savings account as soon as possible. As soon as you pay in a cheque, immediately transfer approximately 25% of it (after deducting the VAT element) into this account. Don’t be tempted to dip into the lump sum that’s building up in this account as you’ll need it when the tax comes to be paid. Keep an eye on the amounts in this savings account. If you seem to be accruing a surplus, you may be able to reduce your contribution to say 22% or even 20%: if the amounts saved seem a little low you may wish to up the percentage to 30% or 35%.

YBC TIP:
Premium bonds are quite a good place to put your tax savings as:

 

  1. The income is tax free
  2. They are accessible but not so easily accessible that you are tempted to use them for a holiday
  3. It’s quite exciting when you get told you have won something (even though it turns out only to be £25), and
  4. You might win £1m! 

For deadlines and penalties, see below.

Tax deadlines and penalties

The HMRC newly self-employed helpline:
There is an HMRC helpline specifically for those newly self-employed. Phone: 0300 200 3504.

  • Whilst you can fill out a paper return with an earlier deadline (31 October) a self-assessment tax return must be completed by 31 January following the end of the relevant tax year (which usually ends on the 5 April in the previous year).
  • It is certainly worthwhile employing an accountant to fill this out for you – the form is not straight-forward and using an accountant is likely to increase your cash flow (by setting your accounting year end at an advantageous date), save you money (as they know what can properly be claimed) and also save you from sleepless nights (because they have filled in all the correct boxes and reminded you that you made a payment on account in July so you do not pay HMRC twice).
  • This goes a fortiori for anyone who is mixing self-employed practice with employment e.g. as a judicial assistant at the Court of Appeal or the Supreme Court.
  • NB if you obtain income from other sources e.g. from a property which is rented out or dividends (which carry a 10% tax credit) this will also need to be declared in your self-assessment.
  • For further information see the Taxation Handbook. Income tax is dealt with from page 8.
  • Payments are due on the 31 January and the 31 July each year (the July payment is on account of the next year). This is explained in detail in the Bar Council’s Taxation Handbook from paragraph 7.
  • Penalties are incurred if the self-assessment is made late, the tax is paid late or the assessment is wrong and you are at fault (including negligence).
  • Significant penalties should be avoided, should you ever wish to apply for judicial office.

Record keeping: regulatory requirements and HMRC

  • Most chambers have some form of diary system which records your cases, fees, expenses and what has been paid.
  • There is a similar requirement to keep adequate records supporting fees charged or claimed (rC88).
  • It is a good idea to set up some record system yourself – for example in Excel – to keep a note of the name and date of case, what the fee was, what expenses there were and whether the fee has been paid. This will allow you to keep track of your income and of the level of debt owed by your instructing solicitors.

VAT

The current threshold for registering for VAT is a turnover of more than £82,000. If you are at or near this threshold it is essential that you consider whether you need to register for VAT as soon as possible: you must register before you go over the threshold and it is easy to lose track.

  • Many chambers encourage tenants to register for VAT well before the threshold. First, it ensures that there is no need for concern about exceeding the threshold and careful monitoring of your finances accordingly. Second, it indicates to solicitors, clients and opponents that you are an established and experienced practitioner. In many civil sets, pupils are encouraged to register as soon as they become tenants even if there is no prospect of them making this kind of money for several years.
  • If you undertake Crown Court criminal legal aid work it is recommended you are VAT registered, because your fee claim may have to include the fees of other barristers who worked on the case. If they are VAT registered and you are not, you cannot claim the VAT back from the Legal Aid Agency, but will have to pay the other barristers the VAT out of your own pocket. See the Bar Council’s Graduated Fee Payment Protocol at: http://www.barcouncil.org.uk/media/17782/remgfs5.pdf.
  • Don’t forget to add VAT to speaking fees and to writing fees and don’t forget to account for the VAT as well.  This applies to income tax as well as VAT.
  • Many accountants offer completion of VAT returns for free if they are completing your tax return; look into whether your accountant offers this service.
  • VAT returns are required four times a year within a month of the end of each quarter, with the VAT bill to be paid within a couple of weeks thereafter.
  • Once you register for VAT, let your clerks know immediately and give them your VAT number so that they can add it to your invoices.

We would recommend setting up a separate savings account into which you can pay the VAT element of every payment you receive. This avoids any panic at the end of the quarter about having the required sum available.

Pensions and pension options

There is a cliché that no one at the Bar ever retires. Whilst this is true for some people and may be true in your case, the reality is that when you get to retirement age, you will want to have the choice of whether to continue, to reduce your hours or to stop work completely. In order to give yourself this choice, you need to start saving and the earlier you start the less per month you have to save to ensure a decent income when you get older.

It is not essential to save everything in a pension wrapper – the important thing is that you save. If you are between 20 and 30, you should be looking to save at least 10-15% of your income, whether this is in an ISA, investments or a pension.

The disadvantage of a pension is of course that you cannot access the money until you reach retirement age. Whilst this may be off-putting, bear in mind that it is also an advantage: there will be no option and therefore no temptation to take money out of this savings pot to pay for short-term costs.

The main advantage of pensions over the other savings options is of course the tax advantage: if you’re under 75, subject to an annual allowance, all the tax you’ve paid on the money you contribute to your pension is paid by the government as an additional deposit into your pension pot. So, for example, if you are a basic rate taxpayer and pay £80 a month into a pension, the government will contribute £20 and your pension pot will receive £100 a month.

For pensions providers, we recommend that you consider the YBC’s recommended service partners (https://youngbarhub.com/partners/) for financial advice, planning and pensions advice. These providers offer tailored services for young Barristers, but please be aware that there is a cost attached and you will be expected to pay for their services. Free impartial guidance is available from experts at The Pensions Advisory Service (http://www.pensionsadvisoryservice.org.uk/). Although TPAS won’t advise you on what pension to get, they are a very good jargon-free source of information about the options available.

Accountancy services

It is worth considering getting an accountant.

  • First, you are a business and there is a fair amount of work associated with this, in particular filling in tax returns and VAT returns. This may be too much to handle in your first couple of years when building a practice; having someone to keep on top of things for you will take away most of the work and a lot of the stress.
  • Second, the stress of sorting out this sort of thing will be reduced if there is someone who knows and understands the requirements and can give you simple advice on what you can and can’t claim. Being able to trust an expert rather than relying on your own research in the limited time available will reduce the likelihood of you missing deadlines (which can incur a fine) or getting something very wrong (which could result in criminal penalties in extreme cases).
  • Third, if the accountant gets it wrong you will have some redress.

You may be put off by the cost of an accountant, but it is always worth investigating: many accountants offer free accounting services for your pupillage year (or your first year of practice or year with them). Thereafter, some offer competitive fixed fees based on your earnings. Having an accountant may also pay for itself in terms of time saved (which you could be using on more remunerative work) and in identifying what items can be claimed against tax.

We would always recommend that when you choose an accountant, you look for one who specialises in or is at least experienced in working for barristers. They will have a much better idea of both the demands and eccentricities of your practice and what kind of paperwork they should be expecting from your chambers (they may be able to guide you in this).

If you are unsure who to choose, ask around chambers for a recommendation or see the Bar Council’s recommended partners:  http://www.barcouncil.org.uk/supporting-the-bar/explore-member-benefits/.

Overdrafts, practice loans, mortgages and credit

  • It sounds old fashioned, but it is helpful to have a good relationship with your bank manager. It is important to make sure that your bank understands that you are a self-employed barrister.
  • Some banks will require you to have a business account and will charge fees in relation to it. Banks may say that they require you to have a business account for tax reasons – this is not the case. Make sure you understand why the bank is suggesting it as part of their doing business with you. If in doubt, shop around!
  • In order to obtain loans and/or mortgages or other credit you will need accounts showing your income. It may also be necessary to provide evidence of your aged debt. Typically 3 years of accounts are needed to show a steady income for a mortgage. Often a mortgage provider will ask for your SA302s (your self-assessment tax calculations), particularly if you do your accounts yourself. If you have done your assessment by post or can’t access your online account you will need to get HMRC to print these for you. Ensure that you ask HMRC to fax them to you (they will not yet send by email): they may take up to 3 weeks to arrive by post.
  • Mortgage brokers may be best placed to help you, as they will know which institutions are likely to be prepared and happy to deal with self-employed individuals.
  • Aside from the usual commercial loans, some companies offer loans secured on your aged debt.