Changes to tax year and accounting rules for the self-employed

Changes to Tax Year and Accounting Rules for the Self-Employed

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From 6 April 2024, new rules affecting how self-employed workers manage their accounts for tax purposes will be brought into force. 

HMRC is bringing self-employed accounting periods into line with the official tax year. Known as Tax Year Basis or Basis Period Reform, the move is part of the government’s wider push to rationalise the tax system and bring down administration costs. 

It’s also argued that aligning accounting periods with the tax year will make life easier for self-employed tax payers, reducing filing errors and ensuring greater clarity about tax liabilities.

Here’s what you need to know.

Income Tax and Self-Assessment

The changes apply to sole traders, freelancers, contractors and partnerships who have to submit a Self-Assessment Tax Return for Income Tax and National Insurance (NI) purposes. Although sole traders pay Income Tax and NI like workers in employment, the way it is managed has more in common with business tax administration than with the PAYE Income Tax system for employment.

This includes the need to keep accounts for tax purposes and to file an annual return. Another similarity to business tax is that, up until now, self-employed workers have been able to choose their own annual accounting period – it hasn’t had to align with HMRC’s tax year.

Tax Year vs Accounting Period

The official UK tax year runs from 6 April to 5 April. This is the period HMRC uses for tax administration. For example, everyone in employment has their Income Tax and NI calculated based on their earnings between 6 April one year and 5 April the next year.

Companies don’t have to use the official tax year as their own annual accounting period. And by association, because they have always been considered businesses, neither do sole traders and partnerships. Businesses can draw up their annual accounts for any 12-month period they choose. Many, for example, use the calendar year (1 Jan to 31 December).

As far as Income Tax goes, it means there are different regimes operating for employed and self-employed workers. If there’s a change in the Income Tax basic rate or personal allowance, for example, it automatically applies to every employed person from 6 April when the changes are introduced.

But for a self-employed worker with an accounting period different to the tax year, it’s not so straightforward. The new rates will apply to any profits earned in their accounting period after 6 April. But the old rates will apply to earnings before 5 April.

This is a key reason why HMRC wants to unify the Income Tax system, for more consistency.

Transition Period

The changes are expected to affect half a million sole traders and partnerships. As many sole traders follow the fiscal year (1 April to 31 March, in effect the government’s own accounting period), there will be no impact on any accounting periods that start between 1 and 6 April.

The 2024/25 tax year will be the first where the change will be in full effect, with the 2023/24 tax year serving as a transitional year. For this year (2023/24), sole traders affected by the changes will have to pay:

  • Income Tax and NI for their last complete 12-month accounting period, as they have done previously;
  • Additional Income Tax and NI to take them up to 5 April 2024, to bring them into line with the new tax year basis ready for the 2024/25 tax year.

However, any tax on profits accrued in this additional period will not have to be paid in one go. Instead, it will be spread out over the next five tax years. Sole traders will also be able to use Overlap Relief to claim back tax should changes in their accounting period for 2023/24 mean they end up paying tax twice on the same profits.

Speak to an expert

If you would like advice on income tax and self-assessment, speak to an expert today.

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