Final opportunity – Urgent planning deadline for the transition to the ‘tax year basis’

Category: Taxation - Posted On: Mar 20 2024

Speed read

Any individual who is a sole trader or partner in a trading or professional partnership will be taxed under the new ‘tax year basis’, which means that profits will be assessed in the tax year when they arise.

The year 2023-24 is a ‘transitional year’, in which we switch over from the current year basis to the new tax year basis of assessment. Due to how the transitional rules work, some businesses could see a temporary increase in their tax bill from this year onwards.

Affected individuals may consider making pension contributions before 5 April 2024 to reduce the impact of the transition profits.

Change to the basis of taxation

In 2023-24, the basis period for businesses with a year-end other than 31 March – 5 April will comprise two elements – their ‘normal’ basis period (i.e., the accounting period ending in the tax year 2023-24) plus the profits from the end of that period to 5 April 2024.

For example, a business with a 31 December year-end will be taxed on profits for:

  1. the year ended 31 December 2023; and
  2. the period from 1 January 2024 to 5 April 2024.

For businesses with a 30 April year end, this will result in almost two years of profit coming into charge and they could see a significant increase in their tax liability. This can be reduced by overlap profits brought forward, although not all business will have overlap profits, or the amounts may be negligible.

Additional profits will automatically be spread over five years, which will increase the tax payable by taxpayers for up to five years, which could have a significant impact on cash flow.

Spreading over five years

HMRC has confirmed that the additional profit will be automatically spread over the five years from 2023/24 to 2027/28 without incurring any late payment interest.

However, for taxpayers who have income around the high marginal rates shown below, the additional profit could attract a significantly higher rate of income tax if it is automatically spread over five years, rather than making an election for the whole additional profit to be taxable in the 2023/24 tax year.

Income Details Marginal income tax rate from 2024/25
£43,663 Scottish higher rate threshold 42%
£75,000 to £100,000 Advanced rate 45%
£100,000 to £125,140 Withdrawal of tax-free personal allowance 67.5%

If you or your partner claims child benefit, you may also be subject to the high-income child benefit charge, which increases your marginal rate of income tax where your taxable income is between £60,000 and £80,000, where punitive marginal income tax rates apply.

If your taxable income is typically around the thresholds above, you may wish to consider making an election to crystallize the whole of the additional profit in the current 2023/24 tax year to avoid the punitive higher rates in future years.

Please contact a member of our team if you would like to discuss the impact of these rules on your tax position.