Changes to the way self-employed businesses will be taxed
The government has confirmed that it will go ahead with its plans to reform how self-employed businesses will be taxed.
If you fall into this category of taxpayer and have a year-end other than 31 March/5 April this will have an impact on you, and you should consider discussing this with your accountant.
To summarise, it is highly likely that the reform of basis periods for the self-employed will be implemented, and it is likely that there will be a transitional year in the 2023/24 tax year and the new rules will take effect from the 2024/25 tax year.
The plan is for draft legislation to be released on 4 November 2021. This will be accompanied by HMRC’s response to the consultation which took place over 2021 and over which many concerns were raised.
Our assessment from the information we have seen, is that the key changes individuals affected need to be aware of are as follows:
- Self-employed businesses will be taxed on profits earned in a tax year, rather than on the profits of the accounting year ending in the tax year.
- Any self-employed business that does not have a 31 March/5 April year end will be affected.
- Affected businesses will be taxed on more than 12 months’ profits in 2023/24, with overlap profits being offset – as though they had changed year end to 31 March/5 April.
- Affected businesses will apportion profits from different accounting years to give the tax year’s profit.
- The changes will impact cashflow in the transitional year for self-employed businesses that do not have a 31 March or 5 April year end, with the first additional tax payable on 31 January 2025.
- There may be knock-on effects for the self-employed, such as a restriction in available pension contributions for 2023/24.
Additional 2023/24 profits created by this change will be spread over five tax years, although it will be possible to opt out of spreading. Self-employed individuals need to also take account of the fact that additional profits from the transitional period will be subject to the new Health and Social Care levy of 1.25%, meaning a marginal rate of 48.25% for additional rate taxpayers.
If you have concerns on the impact of these changes and require advice, contact Haslers for assistance.
Why not follow us on social media to be kept up to date with our latest industry updates.
Facebook | LinkedIn | Twitter | Instagram
Changes to the way self-employed businesses will be taxed