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Business Services  •  Business Tax  •  Personal tax

Self-employed and partnerships, plan to avoid a possible high tax bill in 2025

By RJP LLP on 22 November 2023

We have written a couple of articles about this issue and given how much money could be at stake, here’s another reminder. The way accounting periods are being reported for tax purposes is changing and it means that many self-employed people could get a nasty shock when their tax bills arrive.

It is becoming apparent that many of the taxpayers affected are unaware that in early 2025, they could face a tax bill calculated based on almost two years’ of income. It could come as a nasty shock.

Approximately 528,000 sole traders and partners are affected, because these individuals are not yet using an accounting basis period that aligns with the tax year, i.e. they do not draw up their accounts to 5 April or 31 March.

Starting from April 2024, HMRC will require all sole traders and partnerships to report taxable profits up to 5 April (although 31 March will be accepted). This is to align accounting periods with the tax year and it is required irrespective of a business’s accounting year end.

The 2023-24 tax year is regarded as a “transition year”. This means HMRC will be calculating tax payments due based on more than 12 months’ profit, to ensure that anyone who is affected will have caught up with their payments by the time the new regime starts.

Businesses with a year end of 30 April will be worst affected, with profits of the year ending 30 April 2023, plus profits up to 5 April 2024 (i.e. profits of 23 months) being assessed in the 2023-24 tax year.

Long term, bringing the accounting periods into line with the actual tax year will create a simpler system, which is important since HMRC is moving to quarterly tax payments through Making Tax Digital. Getting to this point is complicated however and could create short term hardship for those who are ill-prepared, and interestingly it brings the tax-take forward for HMRC.

If your business is affected, it is important to check whether there is any “overlap relief” brought forward for which relief can be claimed. This is relief brought forward relating to profits that were taxed twice when the business first started.

Taxpayers who are facing extra tax bills as a result of this change will have the option to spread out the additional tax over five tax years.

If you have any concerns about your taxes and want to understand how the changes to the basis period could affect you please contact us via partners@rjp.co.uk.

Read more articles like this

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