Danielle Dark Private Client Tax Director

• +44 (0)20 7832 0444
• Send me an email
• Download my vCard

Danielle Dark

Private Client Tax Director

Danielle joined the firm in 2023 having previously worked for a Central London accountancy firm for over 9 years within the Private Client Tax team. She is a member of both the Association of Taxation Technicians and the Chartered Institute of Taxation.

Danielle has a wide range of private client experience, including but not limited to non-resident and/or non-domiciled individuals, buy-to-let landlords, business owners and high net worth families. She is passionate about providing good client service and developing longstanding relationships with clients.

Outside of work, Danielle’s main passion is travel (particularly to off-the-beaten-track destinations), and she spent a year travelling the world before joining Wilson Wright.

 

17 Jun 2024

The Basis Period Reform only affects self-employed individuals (sole traders) and partnerships, in particular those which do not use an accounting date between 31 March and 5 April. It does not affect companies.

Historically, sole traders and partnerships have been taxed on the profits arising within their 12-month accounting period, regardless as to whether this period is in line with the UK tax year or not.

Under the Basis Period Reform, which came into effect for the 2023/24 tax year, all unincorporated businesses will now be taxed on the profits that arise within each UK tax year (i.e., from 6 April to 5 April or 1 April to 31 March, if preferred) rather than that of their accounting period.

Even if your business’ accounting date is between 31 March and 5 April, it is important to check if you have any overlap relief available and claim the relief in the 2023/24 tax year. This may be the case if you have previously changed the accounting date.

What are the implications for 2023/24?

The 2023/24 tax year will be treated as a transition year in reaching the new basis of assessing profits. Your taxable profits in this year will broadly be calculated as follows:

• Profits arising in the business’ usual accounting period; plus

• Profits arising in the period from the end of your usual accounting period to 5 April 2024 (or 31 March 2024, if preferred); less

• Any available “overlap relief”, being profits that were effectively taxed twice when you first began trading, or if your accounting period was changed at a later date.

You may be able to spread any profits arising in the additional period (i.e., from the end of the usual accounting period to 5 April 2024 less overlap profits) evenly across 5 tax years to reduce the tax burden in 2023/24.

Please note that any profits spread over the 5-year period will be taxed at the prevailing rate of tax in each relevant tax year; if tax rates increase, you may pay more tax in the long run on this income.

In addition, dependent on your personal circumstances, it may be more efficient to pay tax in 2023/24 on the full profits arising within additional period, with no election to spread these profits over a 5 year period – for example, where your income is set to increase in future years and may therefore be subject to higher rates of tax. Careful consideration will therefore be required to ensure a tax efficient route is selected based on your personal circumstances.

Note that you must use all of your overlap relief in the 2023/24 transition year; if any remains unused after 5 April 2024 this will be ‘lost’ and unable to be used in the future. You should check your previous tax returns to see if any ‘carried forward overlap relief’ is reported, or speak with your usual Wilson Wright contact for assistance.

How will the increased profits affect my tax liability?

Given your taxable profits are likely to be higher in 2023/24 than in prior years, we recommend that you file your 2023/24 Tax Return as soon as possible to allow sufficient time for you to plan for these increased liabilities, the first of which will be due by 31 January 2025.

Transition profits are subject to special treatment within the income tax computation to mitigate unwanted repercussions of an artificial spike in taxable income in 2023/24. This treatment is effective for the following:

• Calculating the high-income child benefit charge, under which any child benefit claimed will begin to be reclaimed if your income exceeds £50,000 in the 2023/24 tax year (£60,000 in future tax years).

• Ensuring your entitlement to tax-free childcare (which will be revoked if you have adjusted net income exceeding £100,000).

• Calculating your annual allowance for pension contributions.

However, this special treatment does not shelter your tax affairs from the following implications:

• If your adjusted net income exceeds £100,000 as a result of the increased taxable profits in 2023/24, your personal allowance will be reduced by £1 for every £2 that your adjusted net income exceeds this threshold. The effective rate of tax for income between £100,000 and £125,140 is 60% as a result of this reduction.

• Savings income (e.g., bank interest) currently benefits from the tax-free “savings nil rate band” which tapers depending on the level of your total income in the year (as outlined below). An increase in your total taxable income may therefore result in a higher portion of your bank interest being taxed.

• Basic rate taxpayers                       £1,000
• Higher rate taxpayers                   £500
• Additional rate taxpayers            £0

• Transition profits will be included when calculating your student loan repayments due via self-assessment.

• Your transitional profits will count as “relevant earnings” for pension purposes. The personal pension contributions you can make in a tax year are limited to 100% of your relevant earnings. This could therefore be good news for individuals who wish to make increased personal pension contributions.

Going forwards, do I need to change my accounting period?

Businesses with an accounting date outside of 31 March to 5 April can continue using their current year-end date for accounting purposes. However, this will create an additional administrative burden when filing the sole trader or partner’s self-assessment Tax Return.

Where the current accounting period is used, the accounts for two periods will need to be time-apportioned to calculate the taxable profits for each tax year. For businesses with accounting dates that are later in the year, accurate profit figures for the second period are unlikely to be available before the Tax Return filing deadline. Any provisional figures used within the Tax Return filing will need to be amended at a later date; this may result in an additional payment of tax, plus late payment interest and penalties.

With Making Tax Digital for Income Tax (i.e., quarterly reporting of business and rental income) scheduled to come into effect from 6 April 2026, businesses that continue with their current accounting period may see further additional administrative burdens on the horizon.

If you have any queries regarding the above, please reach out to your usual Wilson Wright contact, or liaise with Danielle using the contact details below.