UK firms have enjoyed a healthy year when it comes to fee income growth, but this has not necessarily translated into bigger profits, suggests a major new look at the sector.

According to PwC's Law Firms' Survey, published today, income has grown at 89% of UK firms in 2018, compared to 75% in the same period last year. However, profit margins for 32% of the top 100 firms fell this year.

PwC says the top 10 firms have suffered a fall in profit margins for the fourth consecutive year while the top 11-25 firms are closing the profitability gap. The top 51-100 band have outperformed the top 26-50 group.

On average, all bandings in the top 100 have improved profit per equity partner. However, PwC says this has largely been achieved by reducing equity partner headcount for the top 25 firms and mainly at the junior fee-earner level: 'This has had a knock-on impact of increased chargeable hours across all bandings and the vast majority of grades, whilst target hours have also increased. This is coupled with tight management of partner numbers and follows last year's focus on achieving efficiency and improving profitability through reduction of business support headcount.'

Commenting on today's report, David Snell, who leads PwC's law firms advisory group, says 2018 has been a strong year for the legal sector despite current levels of political and economic uncertainty.

However, he said: 'Whilst we have seen an improvement in fee income from most law firms, profit margin erosion has continued for many as firms struggle to contain costs. In particular, staff costs as a percentage of fee income grew for the fourth year in a row for the top 10. Increased salary costs are still being driven upwards by US firms and this has an inevitable knock-on effect across the whole sector with firms battling to retain and attract the best staff.'

Looking ahead, none of the respondents said they were planning to relocate their head office, close a regional office or relocate a shared service centre because of Brexit. A 'small number' expect partner and staff headcounts to change. PwC predicts that firms will need to continue to invest in technology while new entrants, along with US firms, will seek to disrupt the market.