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Changes to how tax is calculated for the self-employed

New legislation taking effect in the tax year ending 5th April 2024 will affect how self-employed businesses that prepare accounts to a date other than 31 March or 5 April calculate income tax due – known as the Basis Period Reform. Under the old rules it was possible to delay paying tax on your income by “adjusting” your accounts date and these new rules are aimed creating a level playing field for everyone.

self-employed

Basis Period Reform explained

The new rules will alter how the taxable profits of accounting periods are matched into tax years for the purposes of self-assessment profit reporting and income tax calculation.

At the moment, when reporting taxable profits for a tax year, it is necessary to report the taxable profits coming from the accounting period that ends in the tax year in question. For example, a self-employed sole trader preparing accounts to 30 June, would usually use the taxable profits from his/her year to 30 June 2021 as the basis of their 2021/22 income tax self-assessment.

From tax year 2024/25 onwards, a new ‘tax year basis of assessment’ will apply. This is not a requirement to prepare accounts to 5 April each year (although a business could choose to do so) but instead will require an apportionment of the tax adjusted results from each accounting period that overlaps into the tax year in question.

How this may affect you

For example, a sole trader preparing accounts to 30 June will need to take the tax adjusted results for 30 June 2024 and 30 June 2025 and:

  • Calculate 3 months (3/12ths) of the 30 June 2024 tax adjusted results; and
  • Add 9 months (9/12ths) from the 30 June 2025 tax adjusted results,
  • to create a tax adjusted profit/loss figure for the year to 5 April 2025.

The tax year 2023/24 will be a transitional year where, in addition to the accounting results that are brought into account under the current rules, a ‘transitional component’ will also be added in to ’stretch’ the reported taxable profits from the end of the usual accounting period used as the basis to 5 April 2024. If the business is holding something called ‘overlap profits’, these are then deducted in full by way of ‘overlap relief’.

In an attempt at fairness, spreading rules will potentially spread any accelerated profits (and therefore accelerated tax payments) over five tax years, starting in 2023/24.

Count On Cardens

This area is complicated so please talk to us about your options ahead of the changes if you are self-employed and think this affects you. We are here to help! Please talk to your usual Cardens team or email us at for more information.

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