Published: 14th December 2025
Managing the finances of a law firm or legal practice goes far beyond ordinary bookkeeping. Law firms regularly handle not just their own operating income and expenses, but also money that belongs to clients — and mixing these is strictly prohibited under professional regulatory rules. In this episode of The BookkeepingPackages Podcast, we unpack the core financial record keeping obligations for UK legal professionals, the rules governing client funds, and how to remain compliant both with HMRC tax requirements and with your regulator’s accounts rules.
Whether you run a small solicitor’s practice, a specialised boutique firm, or provide legal services as a registered foreign lawyer, understanding the standards for bookkeeping and client money handling is fundamental to protecting your firm’s reputation and financial position.
Why Client Money Rules Are Central to Law Firm Bookkeeping
A law firm’s bookkeeping needs to deal with two distinct types of money:
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Office money: Income that belongs exclusively to the firm, such as fees charged for services and expenses paid by clients once earned.
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Client money: Funds received from or held on behalf of a client for legal work that has not yet been completed or billed.
Under the SRA Accounts Rules, client money must be kept separate from the firm’s office account and must be used only for that client’s matters. These rules apply to all firms authorised by the Solicitors Regulation Authority, including sole practitioners and partnerships. Breaches of these rules can lead to serious regulatory action. Solicitors Regulation Authority
This separation is not an optional best practice — it’s a regulatory requirement that ensures clients’ funds are protected and not accidentally used to cover the firm’s operational costs or other clients’ matters.
How to Record and Manage Client Funds Correctly
Accurate bookkeeping for client money starts with proper categorisation and record keeping from the moment funds are received. According to the SRA’s guidance on bookkeeping for client accounts, firms are expected to maintain chronological, contemporaneous records showing:
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Receipt of client money
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Payments into and out of the client account
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Transfers between client accounts and the firm’s office account, once services have been billed
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Current balances on client ledgers that reflect exactly what is owed back to each client and when. Solicitors Regulation Authority
These records should be legible, up to date, and structured so that anyone reviewing the accounts — whether internal team members, external accountants, or regulators — can readily trace how and why money was moved.
Many practices achieve this with dedicated legal accounting software that supports client ledger accounts alongside office accounts, helping to ensure funds are always correctly attributed.
Client Accounts: What They Are and Why They Matter
A client account is typically a separate bank account held in the name of the firm that includes the word “client” — for example, “Smith & Jones Client Account.” This is where money held on behalf of clients is placed immediately upon receipt. Law Society
SRA guidance and the Accounts Rules dictate that:
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Client money cannot be mixed with the firm’s general operating funds
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Money must be held in an account that allows it to be returned at any time
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Client money should never be used to pay for the firm’s own costs without first issuing a bill and having the client’s clear instruction on payment
Failing to maintain this separation correctly can lead to regulatory sanctions, including intervention or fines by the SRA, and reputational damage that goes beyond mere bookkeeping errors.
Professional Obligations Around Reporting and Record Retention
In addition to keeping accurate client and office accounting records, many firms must submit reporting accountant’s reports on their client money systems and controls. These reports help demonstrate compliance with the Accounts Rules, especially for firms that hold significant client funds. ICAEW
Accurate bookkeeping also ties directly into HMRC compliance for tax reporting. Law practices still need to record their own fees, payroll costs, VAT (where applicable), corporation tax or self-assessment liabilities, and VAT returns if they are VAT-registered — all while keeping client funds properly segregated for regulatory purposes.
Common Bookkeeping Challenges for Legal Practices
Legal practices often face specific bookkeeping issues:
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Retainers and advance payments: Money received before services are fully delivered should sit in the client account until earned.
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Fee transfers: After billing, transferring funds from client accounts to office accounts must be documented and justified.
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Interest on client funds: Some practices must have policies covering interest earned on client money, which may need to pass back to clients in accordance with regulatory guidance. Solicitors Regulation Authority
A robust bookkeeping process ensures all of these intricate flows are captured clearly and compliantly.
Conclusion — Professional Practice Begins with Professional Books
Bookkeeping for legal professionals is not just a compliance task — it’s a core part of good practice management. Clear separation of client funds, meticulous record keeping, and adherence to the SRA Accounts Rules protect clients and your firm alike.
If you’d like expert help aligning your law firm’s bookkeeping with regulatory and HMRC expectations, the team at BookkeepingPackages.co.uk is here to support you.
About the Author
Stuart Kerr is the founder and lead correspondent at BookkeepingPackages.co.uk, where he helps UK small business owners, freelancers, landlords, charities, and professional practices streamline their bookkeeping and compliance processes. With over a decade of experience in UK tax compliance, finance strategy and record keeping best practices, Stuart delivers straightforward, actionable guidance that empowers organisations to stay organised and compliant.
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