SELF-EMPLOYED NEED TO PLAN FOR BIG TAX BILLS IN 2023/24Sep 01 2022
Changes to the assessment of the self-employed profits are due to take effect on 6 April 2024. As a result of the new rules, profits (and losses) will be based on the amounts arising between 6 April and 5 April instead of profits/losses of an accounting period ending in the tax year. This means that the profits or losses will need to be apportioned if the business accounts do not coincide with the tax year. This is intended to go alongside the start of Making Tax Digital for income tax.
Transitional rules proposed for the previous 2023/24 tax year could result in significant tax bills for some sole traders and partners, particularly those with an existing 30 April year-end. Under the current regulations, profits of the year ending 30 April 2022 would be taxed in 2022/23, while under the new regulations, profits arising between 6 April 2024 and 5 April 2025 would be taxed in 2024/25. But what about 2023/24?
The profits taxed in 2023/24 will be those for the year ending 30 April 2023 plus those for the period 1 May 2023 to 5 April 2024 – in total, 23 months of 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 – those will often be much lower than the extra 11 months that are being taxed in 2023/24.
The transitional provisions provide for the “excess” profits to be spread over the next five tax years to smooth out the excessive tax bill.