If you are self-employed, the new tax year may be longer than you think.
If you are self-employed, until 2023/24, you have normally been taxed on the profits made in the accounting year that ends in the tax year. For example, if your accounting year ran to 30 April, then in the last tax year, 2022/23, you are taxed on the profits for your accounting year ending on 30 April 2022 – a few weeks after the start of the tax year.
Some while ago, the government decided that it would speed matters up by forcing all the self-employed (including partners in partnerships) to pay tax on the profits earned in the tax year. As the example above shows, transitioning from the accounting year system to a tax year system involves a catch-up exercise that theoretically taxes more than 12 months’ profits within a single accounting year.
How it works
Unless your accounting year ends on 31 March or 5 April, that is what will start happening in this accounting year. Taking the 30 April year end again, in 2023/24 the default position will be that your taxable profits are:
- The “normal” calculation of profits for the accounting year ending 30 April 2023, plus
- One-fifth of a catch-up element is equal to:
- Your profits from 1 May 2023 to 5 April 2024 (341/366ths of the profits in your account year ending 30 April 2024), less
- Any overlap relief because of double taxation that occurred earlier (typically when you started trading).
Over the next four accounting years, your taxable profits will include 12-month earnings and a one-fifth catch-up element. The personal allowance and higher rate threshold will remain frozen during this period.
Alternatively, you can choose to have any amount exceeding a fifth, up to the full catch-up element, taxed in 2023/24, with corresponding adjustments for later years.
If your head is hurting, you are not alone. Consider the implications and prepare for a larger tax bill in January 2025 with the remainder of the tax year. Take advice for planning opportunities, such as making a large pension contribution in 2023/24.
How can we help you?
If you are self-employed, you may find that the new accounting year is longer than you expect. If you need help to understand what the tax implications are for you, then please contact us on 01444 716946 or on 01273 963656 or alternatively email us here.