I can hear them already. “What’s happened to my tax, why is it so high and why do I have to submit 2 tax returns?”

We have been banging this drum for a while but you are going to be hearing a lot more about it in the coming weeks and months. But you know what some people are like, they will only realise that something is going on when they have to pay so much tax in January 2025 … and that will be our fault!

So, what is happening? Well, if you work through a company you can sit back and laugh. If you are a sole trader of trade through a partnership, then you might be affected. The reason I say might is that, if you have a 31 March or 5 April year end, you will not be affected. If you have any other year end, e.g. 30 April, 31 May, 30 June and so on, you are likely to be under the cosh.

Since the mid-1990s we have all been accustomed to sole traders and partnerships being taxed on the profits for an accounting period in the tax year in which that accounting period ends. So accounts to 30 April 2022 were taxed in 2022/23. At one time this was a very popular date for a year end because it meant the longest delay between earning the profits and having to pay the tax on this profits.

From 6 April you will be paying tax based on the actual profits earned in that tax year. So, if you are a sole trader or partnership with a 31 March or 5 April year end, you will see no change.

But let’s look at what happened if, for example you have a 30 April year end…

In 2022/23 you will have paid tax on your profits to 30 April 2022.

In 2024/25 you will pay tax on the actual profits arising, so, unless you change your year end, your tax will be calculated on 1/12 of your profits to 30 April 2024 and 11/12 of your profits to 30 April 2025.

Now, here is the sting in the tail. For 2023/24 you pay tax on everything not included in your 2023 and 2025 assessments, that is the whole of the profits for the year ended 30 April 2023 plus 11/12 of the profits for the year ended 30 April 2024. That’s 23 months profits being taxed in one year.

HMRC are nice people so there is an element of relief so that the “extra” profit can be spread over 5 years. Isn’t that nice of them. So of the profits for the 23 months, 12/23rds are taxed in 2023/24. 11/23rds are spread out over 5 years but the first 1/5^th will be added to your profits in 2023/24. So whatever happens HMRC are going to get a windfall tax take, just before a general election. I wonder what they will do with it.

The problem is not just the acceleration in profits being subject to tax, but also that many people will be pushed into higher rates of tax than would normally be the case.

Things to think about:

1. Change your year end to 31 March: This will not help with the tax burden itself but will make it a lot easier to submit returns and pay the right amount of tax first time. If, for example, you have a 31 January year end, your final 2025 tax return cannot be submitted until after the 31 January 2026 accounts have been completed, by which time the deadline for submitting your return will have passed.
2. Change you VAT periods: this will not save you any tax but it is always good to have your VAT periods coincide with your accounting year end. However, with MTD just around the corner and quarterly accounting to HMRC based upon calendar quarters, you will be set up ready to the changes coming in the next couple of years.
3. Incorporate your business: If you do this shortly after 5 April 2024, you can spread the extra profits 1/5 in 2023/24 and 4/5 in 2024/25. However, if you incorporate in such a way as to create a loan account in your new company, you can live on this, taking money from the company tax free, and so the “extra” profits are your only personal taxable income and so likely to be taxed at lower rates. This does not work for everybody so make sure you take proper advice before you do this.
4. Consider putting lump sums into your pensions. You get tax relief at your marginal rate on the premiums so if you have been pushed into higher rated, get the government to pay 40% or more of the premium. That’s a cheap pension!

I am sure there will be plenty more tax saving ideas being banded around over the next 12 months.  But you cannot say that we did not warn you of what was coming.

This really is going to be an interesting year.

Alan E Long

The Long Partnership

07770 738770