Partnership tax services
Supporting Partnerships and LLPs with both their business and personal needs.
What you need to know about the Basis Period Reform
From 2024/25, the rules on taxing profits of unincorporated businesses will change. Going forward all individuals will be taxed on profits that arise in the year to 5 April. Sole traders and members of a partnership whose accounts are not currently prepared to 31 March or 5 April will be impacted by the upcoming changes.
How will the changes impact you?
2023/24 will be a transition year where your taxable profits will be made up of the profits from the end of the 2022/23 basis period to 5 April 2024, less any overlap profits created in the opening years of the business.
The transitional year rules can create a large spike in taxable profits, with the impact being most severe for individuals whose taxable income will sit between £100,000 and £125,140 due to the abatement of the personal allowance. You should note that the transitional profits will not affect the level of your income used to calculate entitlement to child benefits and annual allowance for pension contributions.
The increase in your taxable profits does not equate to an increase in your actual share of profits, so you could find yourself paying additional tax on the same level of earnings, resulting in a decrease in your take-home pay.
You will have the option to spread the transition profits equally over a maximum of 5 tax years or tax them all in 2023/24. You should consider factors such as cashflow, the withdrawal of the personal allowance, whether profit levels force you into the additional rate tax band where income is taxed at 45%, and how likely it is that we’ll see an increase to income tax rates in future tax years.
How will the changes work in practice?
Businesses that have a financial year outside of 31 March will have to calculate taxable profits every year by apportioning profits from two accounting periods.
The self-assessment tax return is due for submission by 31 January following the end of the relevant tax year and, depending on the year-end, it may not be possible for businesses to finalise their accounts in good time for the filing deadline. As a result, your tax return may have to be submitted based on estimated figures and re-submitted when the accounts have been finalised. This results in an increased compliance burden and potentially increased professional fees.
Any under or over payments of tax will also attract interest, with interest on underpayments charged at a base rate plus 2.5% whereas overpayments attract interest at 1% below the base rate.
What are your options?
Change of year end
Businesses may wish to change their accounting year-end to align with the tax year to avoid the need for estimated figures and apportionment. However, this may not be possible or practical for all businesses, for example, where the UK business is part of an international business, where the business operates seasonally or where there are regulatory requirements which mean they need longer than 10 months to finalise their accounts.
Take advice
You may consider options for reducing your income tax liability in the affected years where your income will spike, such as making pension contributions, gift aid donations, or tax-advantaged investments.
Get in touch
We can work with you to provide tax and financial planning advice, helping you to come to an informed decision on how best to prepare for the basis period reform.
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