Changes to self-employed taxation

22 April 2024

For their April article, the Brand Financial Training team look at how self-employed taxation changes for the 2024/25 tax year and how those starting businesses in 2023 and 2024 are affected.

For self-employed clients, the basis of taxation changes in tax year 2024/25.  From then, it will be the profit or loss that arises in the tax year that will be taxable, regardless of the client’s accounting year.  This is called the Tax Year Basis and any business that started during 2023/24 would have gone straight onto this basis.

Any business that has used a year-end date of between the 31 March and the 4 April  will be deemed to have a year-end date of the 5 April and will see no difference in their taxation basis as they already had an accounting year that coincided with the tax year.

However, for those businesses which had a year-end that was not already in line with the tax year, 2023/24 was a transitional year.

Example – Amy

Amy has been in business for some years.  Her accounting year runs from the 1st September until the 31st August.  Her profits since 2022/23 are taxed as follows:

2022/23           Current Year Basis

Tax would have been based on her profits that ended on 31 August 2022 (1st September 2021 – 31stAugust 2022 falls into the 2022/23 tax year).

2023/24           Transitional Year

Tax is based on the profits that ended in the tax year, so 1st September 2022 – 31st August 2023 PLUS profits from 31st August 2023 up to the 5th April 2024.

Transitional year profits (ie those from 31st August 2023 to 5th April 2024) will automatically be spread over 5 years.

Any overlap profits (see below) that Amy has can be brought forward and set against the transitional profits.

Although 20% of the transitional profits must be taxed in this tax year, Amy can decide to elect for more transitional profits to be taxed in 2023/24 with the remainder being spread equally over the remaining 4 years.

2024/25           Tax Year Basis

Tax will be based on Amy’s profits from 6th April 2024 to 5th April 2025.

Overlap profits

With the old Current Year Basis, it was possible (due to the way the rules worked), that some taxpayers would be taxed more than once on the same profits.  These are the overlap profits mentioned above in the example, which can be used up during the transitional year.

Transitional year extra profits

These are not taken into account when calculating income for the annual allowance for pension purposes or the High Income Child Benefit Charge.  However they are taken into account for the reduction in personal allowance.

Reporting profits from 2024/25

Profits earned during the tax year need to be reported, so those earned from 6 April 2024 to the 5th April 2025.

If a self-employed client has an accounting year that is between 31st March and the 5th April then the figures are inputted as normal.

If the accounting year is different than these dates then two sets of accounts will be needed as follows:

  • 6 April 2024 to the year-end date
  • The start of the new business year to the 5 April of the following year

Example – Sam

Sam has an accounting year end of 30 November; he will report his profits as follows:

  • 6 April 2024 to 30 November 2024
  • 1 December 2024 to 5 April 2025

HMRC has confirmed that taxpayers can apportion profits by days, weeks or months, as long as the method is used consistently.

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