Sole traders
Change in basis of assessment
Tax year 2023/24 was the transition year from the ‘current year’ basis of assessment (which charged tax on the profits of a 12-month accounting period ending in the tax year) to the ‘tax year’ basis of assessment, which taxes the profits actually arising in the tax year. Only businesses that already have a year-end between 31 March and 5 April will be unaffected by the change.
For 2024/25 onwards, all businesses are taxed on a tax year year basis.
Under the transition year rules:
- Up to 23 months’ worth of profits come into charge in 2023/24, with overlap profit (which usually arises on commencement of trade) being set off against the additional months’ profits.
- The extra profits will be spread over five years, to avoid a large additional tax charge arising in one year.
- The taxpayer may choose to advance the spread profits into an earlier year if it is beneficial to them (e.g. to use up basic rate band) by election on their tax return.
- If businesses do not have an accounting date between 31 March and 5 April, they will need to file their return every year using partly provisional figures and, when the final figures are available, amend the return (usually when the following year’s tax return is filed).
‘Cash basis’
For 2024/25 and subsequent years, whatever the level of profits, cash basis is the default method of calculating taxable profits.
If you wish to elect out of the cash basis, you have until one year after the relevant self-assessment filing date to make the election (e.g. elections for 2024/25 will need to be made by 31 January 2027). Your taxable profits will then be calculated by matching income and expenditure to the period to which they relate, irrespective of the cash movements.
Losses
- Losses made by an unincorporated business for tax year 2024/25 can be offset against your other income of that year and/or 2023/24, subject to a maximum of £50,000 or 25% of your total income for the year (whichever is greater).
- Unused losses can be carried forward against future profits of the same trade with no limit.
- Further options may be available to obtain relief for losses in the early years of a business, or on its cessation.
Planning points
- Employing a spouse or child might allow them to utilise their personal allowance and provide a NICs record for state pension purposes. The level of salary paid must be commensurate with the duties performed and must meet National Minimum Wage requirements.
- Pension contributions can also be made on behalf of a spouse or child whom you employ, to save tax and NICs. Any contributions made should be reasonable in relation to their working hours and salary.
- Note that the above two points are equally applicable for companies.
