Financial Planning: a new year for both experienced and fledgling barristers

As a barrister in chambers, being self-employed requires dealing with all the financial and administrative issues that their employed counterparts do not generally need to think about. This means managing their cases and clients, and organising their finances efficiently so they can pay their chambers rent, pay their income tax bill by the end of January, pay VAT when it falls due - and still have enough to live on.

Organisation and forward planning is key to effective and efficient financial planning for the self-employed barrister. It’s not just about your income and the unavoidable financial outgoings (expect your usual overheads to account for up to half of your turnover); it’s also about your future security and that of your spouse or partner, and your children or other family members you need to support as you progress in your career.

This requires broader thinking beyond your immediate needs, around pensions and life insurance, investing spare cash for your children’s future, income and mortgage protection, inheritance tax planning, and so on.

If you’re a new barrister, this can be particularly daunting because you will have a wider range of financial and other issues to get to grips with from the start. You will need to consider whether to work as a sole trader or under the umbrella of a limited company, which expenses are deductible for income tax purposes, whether it pays to register for VAT, and whether to register for the VAT flat rate scheme.

You will also need to be aware of the key dates for submitting tax and VAT returns and making payments so that you can be prepared to meet those deadlines and avoid penalties. You must also maintain accurate and reliable records – start off by doing this digitally so that you are MTD-compliant (for more on this, see below).

Other potentially complicated issues for barristers early in their career include understanding the rules of cash basis of accounting for the first seven years of call or practice, and deciding which bar debtors and work in progress have to be introduced into your accounts after seven years under the rules. It sounds technical, but your accountant will explain the rules to you. The decisions you take now as a young barrister can significantly impact your financial position later on, and taking specialist advice from an experienced accountant will really pay off.

Whilst many of these issues are the same for experienced barristers, effective financial planning remains just as important. It’s vital for all barristers to keep their finances under review as their financial and personal circumstances change. As your income increases, can you start to invest cash sums? Does your life insurance and critical illness cover still meet your need and that of your family – or might there be a shortfall? Are you in a position to boost your pension payments or start an ISA? Is your mortgage cover sufficient?

Cashflow is undoubtedly the biggest item to be aware of. Managing your money effectively on a day-to-day basis is the ideal foundation for effective future planning. As your monthly income is most likely variable, it may be a challenge to manage your cashflow, but it is always sensible to put away a proportion of your income (some suggest a half of it) into a separate tax account as it comes in – to keep it ringfenced from your routine expenditure. If funds allow, put extra cash away in case an emergency or the unexpected arises.

The impact of tech on financial planning
Remember the positive impact of continuing technological advances on businesses, and the vast benefits it offers to all – including HMRC. Barristers need to know that HMRC’s Making Tax Digital (MTD) scheme, which marks the beginning of the end of tax returns as we know it, will shortly be live. MTD will require businesses - which includes barristers - who are over the VAT threshold to keep digital records for VAT purposes and submit their tax submissions from April 2019. Note that this will be quarterly rather than annually. If your turnover is below the VAT threshold, you do not yet have to switch to MTD – but you probably will be required to do so by around April 2020.

Under MTD, you will have access to digital tax accounts, with the information HMRC required already automatically uploaded. Under and over payments of tax should become a thing of the past, and you will have a digital account showing your complete tax position. This means self-employed barrister who do not yet keep digital financial records now, need to start doing so. If you use spreadsheets, don’t worry as you can continue do to so (says HMRC) – as long as they are MTD-compliant.

If you need guidance, seek out specialist accountants for counsel who are familiar with the MTD scheme and what you should be doing. Using cloud-based accounting software will be necessary for it, and barristers can also utilise this to manage their general financial matters, for instance, using their mobile devices to quickly record expenses. Streamlining in this way makes perfect sense for busy professionals.

However, with all tech innovation, barristers (and their chambers) must ensure they remain compliant with their data protection obligations, particularly now that the General Data Protection Regulation (GDPR) is a fixture. As a barrister, you are a data controller (but not a data processor) for the purposes of the GDPR, and you are personally responsible for compliance with the GDPR. You, or your chambers if appropriate, should make sure the provider of any IT solution you use for your finances and administration is GDPR compliant. The issue of cyber security should also be high on your agenda as far as the tech you use is concerned.

Lastly, however long you have been practicing, it is important to make a will if you haven’t already done so. Protecting your assets by having an effective will is one of the best bits of financial planning you can do. If you have made a will, keep it under review - particularly if your circumstances change.

Whilst financial planning can be challenging at times, it is vital for your financial security. Find the right financial adviser and accountant, preferably those with a practical understanding of the profession and how barristers operate, to guide you through your options.

 

 

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