From the 2024/25 tax year, the way that HMRC calculates taxable business profits for Income Tax purposes is changing.
These rules may affect you if you:
- Do not currently have an accounting year end between 31 March and 5 April
- Are a new business still in the early years of trade
- Are a partnership or self-employed business. Please note that this means limited companies are not included.
Read on to find out what these taxation changes will entail, whether you will be affected, and what you might need to do if you are.
Changes coming into place could affect your Income Tax bill
When the 2024/25 tax year begins on 6 April 2024, your profits will be taxed according to the tax year in which you generated them.
This differs to the current rules, which use the business accounting year to make this calculation. For example, if your business had an accounting period of 1 June to 31 May, your income in the 2022/23 tax year would have been based on the profit made between 1 June 2021 and 31 May 2022.
Moving forwards from 6 April 2024, this will instead be based on profits made from 6 April to 5 April each year.
For businesses that have an accounting period already ending between 31 March and 5 April, you will see no change.
The 2023/24 tax year is a transitional year from the old system to the new
Crucially, the current 2023/24 tax year is a “transitional year” from the old system to the new one.
As a result, you will instead need to declare your profits from the end of your last accounting period in 2022/23 up to 5 April 2024.
This may temporarily mean that you may need to pay tax in this tax year on profits generated over a longer period.
For instance, if you previously had an accounting period running from 1 January to 31 December, that would mean calculating profits from 1 January 2023 to 5 April 2024. This is a span of 15 months, rather than 12 months.
As this could theoretically be from as early as 7 April 2022 to 5 April 2024, you may have to report up to two years of profits to be taxed in a single tax year.
Again, this means that you will see no change if your accounting period already ends between 31 March and 5 April.
The return for this transitional year is due on or before 31 January 2025. You will be able to spread these “transition” profits over five years, or you can choose to be taxed on them sooner.
You may also be able to claim overlap relief from HMRC for the 2023/24 tax year if your accounting end date:
- Does not align with the tax year (accounting dates between 31 March and 5 April align with the tax year)
- Has been changed to align with the tax year, but you did not use any overlap relief due
- Was changed during the 2023/24 tax year but does now align with the tax year.
It may be helpful to work with a tax specialist, as they will be able to tell you whether you can use overlap relief.
These changes may affect personal financial calculations
Aside from your business, these changes could also affect you personally. For example, they might impact your personal pension contributions, particularly in calculating your income when considering the Tapered Annual Allowance.
This is a threshold for high earners that sees your pension Annual Allowance reduced if you exceed certain earnings limits.
Bringing accounting periods in line with tax years could increase the difficulty of accurately calculating your earnings for the tax year, making it tricky to assess them against the Tapered Annual Allowance.
In turn, you might decide to contribute less to your pension, ensuring that you do not exceed any limits before you know precisely what your earnings for the year will actually be.
Furthermore, the changes could affect the loss of your tax-free Personal Allowance for Income Tax and whether the High Income Child Benefit Charge applies.
As a result of these difficulties, it may be worth seeking advice to help you make pension contributions and other financial decisions as confidently and tax-efficiently as possible.
Get in touch
If you have any questions about these changes, it may be worth speaking to your accountant so you fully understand what is happening and how you will be affected.
Meanwhile, if you would like help managing your money as a business owner, then please do get in touch with us at DBL Asset Management.
Email email@example.com or call 01625 529 499 to speak to us today.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.