Top Tips for Financial Planning

As self-employed professionals, barristers in chambers are managing client work, their administrative duties, and dealing with HMRC. Unless you’re an employed, this, you might also be in the thick of finalising your personal tax return and scraping enough pounds together to pay your income tax bill before 31 January expires.

Proactive, effective financial planning and management can lessen the force of impact of the income tax deadline, as well as VAT deadlines and other payments that crop up regularly. But financial planning is so much wider than pre-empting the inevitable tax bills – it encompasses dealing with pensions, investments, suitable life insurance, rent to chambers, and a myriad other overheads and expenses.

According to the Bar Council, overheads (such as staff costs, office space, travel, insurance, pension and sick pay) account for around half of a barrister’s turnover. It’s well known that barristers’ earnings vary hugely depending on their area of practice. Whilst commercial barristers’ income will be in the upper bracket – criminal and family barristers are, of course, at the lower end. The Bar Council says around a third of barristers earn no more than £60,000, with 13% of them earning less than £30,000.

It’s not hard to see how challenging effective financial planning is for many barristers. We highlight some of the most important elements of financial planning you should be considering.

Get the right financial adviser – and a good accountant
Among the multitude of financial advisers out there, how many truly understand the nature of a barrister’s business? You need an adviser who is a specialist in tax issues and pensions for barristers. For instance, if you are incorporated and registered as a single entity and the entity pays you by way of salary (up to the personal allowance threshold) and dividends, you can potentially save a substantial amount in income tax.

You will also want the best cover in place if you have a mortgage to pay, and you have a spouse or partner, and dependents. Have you considered what will happen if you (or you spouse/partner, for that matter) can no longer work because of serious illness, accident or death? Income protection and critical illness cover will provide certainty and peace of mind if the unthinkable happens.

Even if you already have insurance in place, start the year by reviewing it. Speak to your financial adviser (if you have one), and make sure it is still the best cover for your circumstances – particularly if your circumstances have changed significantly in some way.

A good, proactive accountant is a must. They will prepare your accounts promptly and assess your tax liability early on, freeing up your time to concentrate on your client work and saving you a January panic - and maximising your tax liability.

Managing your cash
As a self-employed barrister, managing your money on a monthly basis may not be easy, due in part to the variability in income from one month to the next. A general rule of thumb is to set aside around third of one’s income and ear mark it for the tax man. But if the Bar Council’s figures are correct – you’d do well to put aside half your income to cover all your overheads, as well as your mortgage or rent. So what’s left? There may not be much, depending on your area of practice, but you may have to consider other expenses, pension payments, and the general cost of living. If you have any left– put some aside for a rainy day in the case of the unexpected, especially if you have dependents.

Pensions
It’s never too early to start financial planning for retirement if your purse strings will stretch enough. Pension planning can be a challenge, and the reality is that many barristers – particularly those early in their career - have no spare cash to put into a pension. According to Cassons for Counsel, the specialist accountants for barristers, on average barristers can start to think about pension planning around three years into their careers. Once you are in a position to start paying into a pension, you will attract tax relief – and you can’t touch your pension pot until you’re 55 so you’ll avoid the temptation to dip in.

If you don’t yet have a pension sorted, a good place to start may be DAM Good Pensions, which has teamed up with the Bar Council and offers members advice on deciding on the right pension structure, and sourcing the right pension provider for you and your particular needs.

If the prospect of starting a pension pot is not sufficiently appealing, you can consider alternative forms of tax effective investment, such as an ISA, which means the funds are available before retirement without any adverse tax implications. Your financial adviser can talk through the options with you.

Make a will
One of the most important things you can do is to make a will, no matter how old you are or what stage of your practice you are at. Whether you’re starting your first tenancy or you’ve been practicing at the Bar for 30 years, you should have a will in place. By making a will, you have control over who inherits your money and assets when you die, and you can structure it in such a way that minimises any liability to inheritance tax on your death.

If you have no will, the statutory rules of intestacy will kick in. The Government could be entitled to an inheritance tax windfall - and a relative you don’t much care for may stand to inherit from your estate.

Keep everything under review
It’s vital to keep your financial and tax affairs regularly under review, given that your personal and financial circumstances can change year on year. Lastly, if you have a will, keep it under review for the same reasons.

 

 

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