Are you aware of the changes to the way your profits are taxed if you are self-employed or in a partnership?

An old trick of Chancellors who cannot raise tax rates but need more revenue is to accelerate the payment of tax. The latest example was announced in October 2021 with the claimed objective of creating “a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years”. As usual, such a promise should be treated with caution.

The change, which has now come into effect, means that for 2024/25, if you are self-employed (or a member of a partnership), you will generally be taxed on the profits made between 6 April 2024 and 5 April 2025. If your business’s accounting year is different and its year end is not between 31 March and 4 April (all treated as 5 April), then generally:

• For 2024/25 you (or your accountant) will need to apportion two accounting periods to arrive at profit based on the tax year.
• For 2023/24 you will be taxed on:
  • the profit for your accounting period ending in that tax year; plus
  • the profits you make from the end of that period to 5 April 2024, calculated by apportionment.

The acceleration in 2023/24 is subject to two special treatments for the apportioned profits:

• They can be reduced by any overlap relief you have from earlier years.
• The apportioned profits less the overlap relief can be spread over a period of up to five tax years, with a 20% minimum applying for 2023/24.

Managing a higher tax bill

The extra taxable income could drag you into a higher tax band, or mean that your personal allowance becomes subject to tapering. However, you may be able to gain more tax relief by making pension contributions that offset some or all of the additional profit. For more advice on this and other planning opportunities created by the reform, please contact us.