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Get prepared for the changes to how self employment and partnership profits will be taxed


How are profits taxed now?


Under the current system, sole traders and partnerships do not need to have a year end aligned with the tax year. Generally, they are taxed on profits of the year’s accounts which ends in the tax year. For example, an unincorporated business with a 30 June year end would pay tax on the profits to June 2022 in the 2022/23 tax year.


What is changing?


From the 2024/25 tax year onwards all sole traders and partners will be taxed on the profits earned in the tax year itself to 5 April (or to the year to 31 March). The 2023/24 tax year is to be a transitional year, which will cause increased tax liabilities for some businesses whose accounting year end does not fall between 31st March and 5th April.


All profits earned up to 5 April 2024 will be taxable in 2023/24. Using the example above of a 30June year end, taxable profits in 2023/24 will be the year to June 2023 plus the 9 months from July 2023 to March 2024. Accounting year ends will either need to be changed to match the tax year or profits will need to be apportioned into the relevant tax years.


What help is there to mitigate the tax due on the additional profits?


Overlap profits were created if the business has a non-5 April year end, either when self assessment came in or when a business started. Overlap profits are profits which were taxed twice due to how the current system works. However, if there was a loss in the relevant year, there will be no overlap profit.


The overlap profit is available as overlap relief which can be deducted from the profits taxable in 2023/24. However, where the overlap profits have been in existence for a long time the value in real terms will have diminished, and it is also quite likely that a business would have been earning lower profits in its infancy. Therefore, in many cases the overlap relief will be far less than the additional profits being brought into charge in 2023/24.


We understand that those taxpayers with higher taxable profits because of the change will be able to spread the excess profit due to this change over 5 years. However, it is unlikely to be an option where the taxpayer’s business ceases.

We are hopeful that Time to Pay arrangements will be made available for those worst affected.


Other considerations


Where accounting dates are not changed and the year end is near to the 31 January filing deadline, provisional estimates of profits may need to be used. Therefore, we would anticipate that moving the accounting year end would be preferable, although this might be unhelpful for seasonal businesses or be impractical for other reasons.

Businesses with year ends which are not aligned with the tax year currently have longer to pay tax on their profits than those which do. This could have cash flow implications.


If you are worried about how these changes might affect you, please get in touch with us.

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