Self-Employed Need to Plan For Big Tax Bills in 2023/24

The changes to the basis of assessment of self-employed profits are scheduled to change from 6 April 2024. The new rules mean that profits (and losses) will be assessed based on the amounts arising between 6 April and 5 April instead of the profit/loss of an accounting period ending in the tax year. This means that where the business accounts do not coincide with tax year the profits or losses will need to be apportioned. This is intended to coincide with the start of Making Tax Digital for income tax.

Transitional rules proposed for the previous 2023/24 tax year could result in large tax bills for some sole traders and partners, particularly those with an existing 30 April year end. The profits of year ended 30 April 2022 would be taxed in 2022/23 under the current rules with 2024/25 taxing profits arising between 6 April 2024 and 5 April 2025 under the new rules. But what about 2023/24?

The profits taxed in 2023/24 would be those for year ended 30 April 2023 plus the period 1 May 2023 to 5 April 2024 - in total 23 months profits!

The good news is that there would be a deduction for “overlap relief” (as much as 11 months) which typically arose when profits were taxed twice at the start of the business - but those will often be much lower than the extra 11 months being taxed in 2023/24.

The transitional provisions provide for the “excess” profits to be spread over the next 5 tax years to smooth out the excessive tax bill.