We’ve got some important news to share with you today about upcoming Changes To Self-Employed Tax, which could affect over half a million self-employed individuals, including sole traders and partnerships. Industry experts are calling these changes “a very serious tax grab,” and it’s essential to be aware of what’s happening.
Changes to Self-employed Tax Year
Starting on April 6, 2024, these self-employed workers will transition from current-year basis reporting to tax-year basis reporting. In simple terms, they’ll need to report and pay their taxable profits to HMRC by the end of each tax year, instead of their usual year-end accounting dates.
Now, here’s where it gets a bit tricky: HMRC could collect as much as 23 months of tax in one go from some tax payers, rather than the usual 12 months. This shift will have a significant impact on anyone who doesn’t typically draw up their self-assessment to 5th April or 31st March.
What makes this even more challenging is that these changes haven’t been widely publicized or communicated. No additional information has been added to the policy page since it was published in October 2021.
So, what do the Changes to Self-employed Tax mean for your business and cash flow?
Starting next April, all affected businesses will have to report their taxable profits at the end of each tax year. During the transition period, some businesses might have accounting years running for longer than 12 months, possibly up to 23 months. This means that all earnings during this extended period will be subject to tax, potentially resulting in a much higher initial tax bill.
To ease the burden, HMRC is allowing businesses two options: spreading their “transitional profit” over the next five tax years or making one full payment in 2025. Both options, however, can pose cash flow challenges, and for those with up to 23 months of taxable earnings, the second choice means paying tax on almost two years’ worth of profit at once. Plus, there’s the added headache of managing two sets of financial accounts during the transition.
Greater effective tax rate on equivalent income
Now, let’s talk about the higher effective tax rate on the same earnings. The goal of these changes is to create a simpler and fairer system for allocating trading to income tax years. However, leading tax experts are critical of this move, especially considering the challenging economic climate. Emma Rawson from the Association of Taxation Technicians points out that even if you claim the relief, you’ll still end up with a higher tax bill, even if you haven’t made more money. It’s a situation that might make many self-employed workers uncomfortable.
Will there be tax cuts in the Autumn Statement?
As we approach the Autumn Statement on November 22, there’s hope that the government might offer some tax relief to ease the burden on self-employed individuals who have faced years of tax hikes. Reports suggest that there could be room for tax cuts, which would help mitigate the impact of the shift from current year basis rules to tax year basis, providing some relief during the ongoing cost of living crisis.
Stay informed and keep an eye on developments in the coming months. These changes might be significant, but with the right knowledge and planning, you can navigate them successfully. read more about your reporting requirements on our article, ‘Self-Assessment Tax Return deadline‘.
Starting April 6, 2024, over half a million self-employed individuals, including sole traders and partnerships, will transition from current-year basis reporting to tax-year basis reporting. This means they must report and pay their taxable profits to HMRC by the end of each tax year, instead of their usual year-end accounting dates. HMRC will collect up to 23 months of tax in one go, impacting those who don’t typically draw up their accounts to April 5th or March 31st.
The changes have not been widely publicized or communicated, making it difficult for businesses to manage their cash flow. HMRC is offering two options: spreading their “transitional profit” over the next five tax years or making one full payment in 2025. However, leading tax experts argue that even claiming relief will result in a higher tax bill, making many self-employed workers uncomfortable. As the Autumn Statement approaches, there may be room for tax cuts to mitigate the impact of the shift.