Changes to the Basis Period for Sole Traders and Partnerships

CHANGES TO THE BASIS PERIOD FOR SOLE TRADERS AND PARTNERSHIPS

From the 2024/25 tax year, the Basis Period will change, affecting how Sole Traders and Partnerships are taxed on profits from unincorporated businesses.

 

HOW BASIS PERIODS CURRENTLY WORK

Sole Traders and Partnerships are currently taxed on profits for the year end that falls within the tax year – the current year basis.

For example: Trade profits from accounting year ending 30 October 2022 are taxed in the 2022/23 tax year.

Remember, an Income Tax Year (tax year) is the period starting on 6 April in one year, and ending on 5 April the following year. For example, the 2023/24 tax year starts on 6 April 2023 and ends on 5 April 2024.

 

WHAT’S CHANGING?

From the 2024/25 tax year, all profits from unincorporated businesses will be taxed on a tax year basis regardless of their accounting year end.

This current tax year (2023/24) is when the basis of assessment switches over from the ‘year basis’ to the ‘tax year basis’.

This means, all the untaxed profits to 5 April 2024 will be taxed in 2023/24 tax year.

For example, for profits from accounts for the year ending 30 September 2023 the tax position will be:

• All the 12 months profits for the year ended 30 September 2023 will be taxed in 2023/24 tax year plus the 6 months profits from 1 October 2023 to 5 April 2024. In total 18 months profits.

Any brought forward overlap profits will be deducted in the 2023/24 tax year. Overlap profits usually come from the time you started your business.

To minimise the impact of the extended period and the likely increase in taxable profit, the transitional profits will be split into 5 years to minimise the tax liability. However you can elect to tax the profits in one go if that’s preferred

 

FROM 2024/25

After the transitional year all profits will be taxed on a tax year basis.

For a business with a 12-month accounting period ending 30 September 2024, in the 2024/25 tax year, the profits to be taxed will be from two sets of accounts as follows:

 

6 Months from 30 September 2024 accounts

• 6 months from 6 April 2024 to 30 September 2024

Plus 6 Months from the 30 September 2025 accounts

• The profits arising in the period from 1 October 2024 to 5 April 2025

 

Profits will be taxed from 6 April 2024 to 5 April 2025 regardless of the accounting year end.

However, a potential issue with the new rules – using the example above – is that the accounts for the year to 30 September may not have been completed by the time the 24/25 tax return needs to be filed, 31 January 2026.

You may therefore want to consider whether you change your accounting year end to 5 April so that the accounts will be in line with the basis period.

 

For support on the basis period transition or changing your accounting year end, speak to our Tax team today.

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