Significant changes to how the self-employed are taxed

If you are self-employed, until 2023/24, you have normally been taxed on the profits made in the accounting year that ends in the tax year. For example, if your accounting year ran to 30 April, then in the last tax year, 2022/23, you would have been taxed on the profits for your accounting year ending on 30 April 2022.

The changes, which are mandatory, mean that in future all self employed individuals and partners will be taxed on the profits for the tax year, however this change in basis means there must be a transition year, which is 2023/24.

Unless your accounting year ends between 31 March and 5 April your profits in 2023/24 will include profits for the normal 12 months period ending in the year, plus a catch up element, which can be taxed in full in the year or spread over a maximum of 5 years (by default the catch up profits will be spread).

This is best illustrated with an example. Taking a 30 April year end, taxable profits in 2023/24 will be;

• The “normal” profits for the 12 month accounting year ending 30 April 2023, plus
• One fifth of a catch-up element equal to:
  • Your profits from 1 May 2023 to 5 April 2024 (341/366ths of the profits in your accounts year ending 30 April 2024), less
  • Any overlap relief because of double taxation that occurred in earlier years (typically when you started trading or changed accounting date).

In the following four tax years (during which the personal allowance and higher rate threshold are frozen), your taxable profits will be those earned across the 12 months of the tax year (with pro-rated calculations, if necessary), plus that one fifth catch-up element.

As an alternative, you can opt for any amount more than a fifth up to the full catch-up element to be taxed in 2023/24 with corresponding adjustments for later years.

Click here for a more detailed factsheet, however as every situation will be unique we would suggest you get in touch if you would like to consider changing your accounting year end date or investigate tax planning options that arise as a result of these changes.