Following the recent salary hikes in the London lawyer market, many of you might be wondering what this means for your financial future. With NQ salaries at firms like Quinn Emanuel and Freshfields now reaching £180,000 and £150,000 respectively (1) (2), there’s a lot to consider beyond the immediate excitement of a larger pay cheque. Let’s break down some critical aspects.

How Much Do You Actually Take Home?

Earning £180,000 a year sounds fantastic, but it’s essential to understand the real take-home pay after taxes and other deductions. In the UK, this salary puts you in the higher tax bracket. You’ll pay 40% tax on income over £50,270 and 45% on income over £125,140. And National Insurance contributions are 8% on income up to £50,270 and 2% thereafter. So, with a £180,000 basic salary, assuming a standard tax code of 1275L, you can expect to take home around £112,900 annually, or about £9,410 per month. (HMRC PAYE Tax Calculator)

The Impact on Pensions

High salaries also impact your pension contributions. Up to the current annual allowance of £60,000 you benefit from tax relief, which is very attractive at the higher income tax rate you are now paying. However, that tax relief begins to taper down once you start earning £260,000 of adjusted income. So maximising your pension contributions whilst you have the capacity to do is a smart move for two reasons:

1.     You are benefiting from the tax relief at the highest possible rate; and

2.     Starting investing contributing to your pension as early as possible is always the best stime to do so. (See my blog post here)

The tapering of the annual allowance reduces the tax relief gradually down to £10,000 per year. Taking advantage before you reach that threshold is going to feel bold for someone early in their career, but this ultimately the internal battle between your current self and your future self!

Are You Set for Life?

Even with a high salary, prudent financial planning is crucial. Here are some considerations:

1. Lifestyle Inflation: Higher earnings often leads to increased spending. It’s vital to manage your expenses and avoid lifestyle inflation that can erode your financial gains.
2. Savings and Investments: Having a prudent savings plan that incorporates a sensible emergency fund, and making consistent long term investments can have a huge impact on your overall outcome.
3. Debt Management: Not incurring debt is often practically a stretch too far, but limiting yourself to a sensible mortgage for a house purchase, one that has been stress tested for market gyrations is fine. Aggressively paying that down as part of your plan nearly always make sense too.
4. Professional Advice: Having an adviser with deep knowledge and considerable experience that you can draw on, someone who can work with you to tailor a plan for you now and into the uncertain future is invaluable.

Long-Term Financial Security

Taking consideration of those items above is really just the start. Achieving your long term financial goals requires decision making. Continuous decision making in a world where tax and pension rules do not remain static. Financial markets are constantly in flux and the Investment landscape is vast and often confusing.

So you are going to need to be systematic about your planning and decision making. Either you are going to need to find time and motivation to do this yourself, with a new job that is paying a huge salary ie. going to be super demanding, or you are going to need some help.

If you do decide to do this yourself you should be coming up with a plan along the lines of the model I outline in a blog here. You are going to need to think about three main areas to ensure success:

1. Plan: Where you develop a deep understanding of your present finances and future goals and requirements; come up with a forecast that arms you with the information to make informed decisions; and systematically critically review that plan to ensure that you are on track.
2. Risk: Address the complete inventory of the risks that you and your family face and make decisions about your risk management strategy combining mitigation, protection and embracing risks in optimal calibration.
3. Invest: Make the right investments to ensure that in real terms (after accounting for inflation) that you are achieving the returns which you will need to achieve your goals. Most importantly you will need to stay the course and not make any of the common, but huge mistakes that people make when investing.

The current salary trends in the London lawyer market offer incredible opportunities for newly qualified lawyers. Aside from work and career this opportunity exists to build wealth that will define their long term future. The headline numbers are attractive, but it is only when you delve into the detail that you realise there are many important decisions to be made in order to fully capitalise on this opportunity.

Adrian Johnson

Sources:

(1) Legal Cheek, Quinn Emanuel hikes NQ lawyer pay to market topping £180k, (10/05/2024).

(2) City AM, Magic circle law firm Freshfields ups NQ salary to £150,000, (03,05,2024).