The way your taxable profits are calculated is changing and this will affect how much tax you pay and when.

If you are a sole trader or an individual partner in a partnership, from the 2024/25 tax year (tax year ending 5th April 2025) onwards, you will be taxed on the profits for the tax year (the tax year basis) rather than, as now, on the profits for the accounting period ending in the tax year (the current year basis). If you prepare your accounts to a date other than 5 April or 31 March (which is treated as equivalent to the tax year) you will need to apportion your profits from two accounting periods to arrive at the profits for the tax year.

To move from the current year basis to the tax year basis, the 2023/24 tax year (tax year ending 5th April 2024) is a transitional year. The profits taxed in 2023/24 are those for the period from the end of the basis period for 2022/23 (i.e. the accounting period ending in the period from 6 April 2022 to 5 April 2023)  to 5 April 2024. Where the accounting period does not align with the tax year, profits for more than 12 months may be taxable in 2023/24. Relief for any unrelieved overlap profits is also given in 2023/24. These are profits that were taxed twice in the early years or on a change of accounting date.

To prevent traders from being hit with a very high tax bill in 2023/24 without having the benefit of higher profits from which to pay the bill, the additional profits assessed in that year (i.e. those from the end of the previous accounting period to 5 April 2024, less any overlap relief) are spread over 5 tax years from 2023/24 to 2027/28 inclusive. Where this is not beneficial, an election can be made for profits not to be spread.

We can explain what the move to the tax year basis means for you and discuss whether a change of accounting date would be beneficial.  Please get in touch to discuss further.