Are you a sole trader or a partnership?

Do you prepare accounts for an accounting period ending other than 5 April?

If you have answered yes to both these questions above, then you will be impacted by the basis period reform; read on to see how this impacts you.

How do the changes in the basis period affect sole traders and partnerships?

The method of taxing the profits of unincorporated businesses changed significantly in 2023/24 and will also change from 2024/25 onwards. This was originally intended to align with the introduction of Making Tax Digital for Income Tax Self-Assessment (MTDITSA), which will now start to be phased in from 2026/27.

Under the old basis of taxing profits, a sole trader or member of a partnership was taxed on their share of profits of the business’s accounting period ending in the tax year. For 2022/23, the last tax year when that basis applied, profits of year ended 31 December 2022 would have been taxed that tax year. Unless that business changes its accounting date, the profits assessed in 2024/25 would be the profits arising between 6 April 2024 and 5 April 2025 i.e., 9 months of the profits from year ended 31 December 2024 plus 3 months of the profits for year ended 31 December 2025. As the 2024/25 self-assessment tax return needs to be filed by 31 January 2026, it is highly likely that the profits for the later period would need to be estimated and subsequently revised.

The real impact of the basis period reform will be in the 2023/24 tax year, which has just ended. A Sole Trader or Partnership with 31 December 2023 year end, will be taxed on its profits from 1 January 2023 to 5 April 2024, which equates to 15 months profits being taxed during the 2023/24 tax year. The taxpayer will be able to relieve any overlap profits that they have been carrying from their trade. See example below:

Sole trader has a year end of 31 December each year:

  • Year Ended 31 December 2023, profit of £75,000.
  • Year Ended 31 December 2024, estimated profit of £90,000.
  • Has overlap profits of £10,000.

The sole trader will be taxed on profits of £75,000 plus the transition profit of £2,721. The Transition profit is calculated as follows:

  • 96 days of profit from ye 31 December 2024 (£90,000 *96/366) £23,606
  • Less Overlap profit £10,000
  • Transition profit equals £13,606

The Transition profit will be automatically split over 5 years; however, the taxpayer can choose to spread the transition profit over a shorter period.

Another point to note is that the transitional profits will also be used to calculate student loan repayments. However transitional profits will not form part of an Individual’s Adjusted Net Income for High Child Benefit Charge.

If you feel these changes may impact on you please do not hesitate to contact Leanne Hillock, Tax Director at PGR Accountants,