Changing the Basis Period for The Self Employed

Self-employed individuals, including those in a trading partnership, will all pay tax on profits at the same time, under the UK government's new basis period reform rules. Trading trusts and estates will also be affected.

The move, implemented by HMRC, is an attempt to simplify the self-employed income tax payment process where some traders pay tax later due to the end date of their accounting period. The basis period reform follows a consultation and draft legislation issued this summer.

At the moment, individuals operating on a self-employed basis don't have to pay tax on profits in the tax year if their accounting end date isn't 5th April or 31st March. By changing the basis period tax date, everyone will pay tax based on the tax year. For instance, if your business has a 31st May year-end, the profits for the year ended 31st May 2021 are currently taxed in the tax year ending 5th April 2022. That's changing under the new rules so that you would pay the accounts as if they were for the year ended 31st March/5th April.

Bringing all income into line

Other income streams, such as income from property and dividends, are taxed in this way. The idea by HMRC is that paying tax will become easier all-round if profits are brought into line with the basis period tax date of 5th April.

“The reform aims to create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years,” they insist.

The changes to self-employed income tax are to be brought in for the year 2025, making the tax year 2023-2024 the transitional period. In this year there could potentially be tax on 23 months of profit, if your year end is the 30 April. They will receive overlap relief at this point.

However, there won't be any future overlap relief for any self-employed business.

And what about business tax?

Currently, there are no plans to align the accounting period with the end of the tax year for businesses. Businesses can choose to do this if they wish, but, unlike for the self-employed and those in partnerships, it won't be compulsory – certainly at this stage anyway.

Meanwhile, the basis period reform for self-employed income tax isn't expected to affect many people working for themselves. That's because HMRC itself reckons that around 93 per cent of sole traders and up to 67 per cent of individuals in partnerships already file tax in line with the new reform.

Get in touch

Are you due to pay self-employed income tax in the near future and concerned about how basis period reform might affect your business?

If so, you can chat to an adviser here at Keith Graham Chartered Accountants. Tel: 01252 312561 or drop us an email via info@keith-graham.co.uk