The current system of taxing the self-employed that uses basis periods for allocating profits to fiscal years will be abolished from 6th April 2024 and replaced with the Tax Year Basis (TYB).
The new system will now allocate daily profits for all self-employed businesses across the fiscal year, from 6th April to 5th April. The complete alignment will occur in 2024/25, as 2023/24 will be the transition period.
The transition will take place from 6th April 2023. Most affected will be high earners who are self-employed with accounting years ending shortly after 6th April 2023 because, during this transition period, a chunk of profits will be taxed upfront to convert to the new system.
Typical businesses affected by advance tax charges on these ‘transitional profits’ include dentists, doctors, lawyers, accountants, consultants, architects, creatives, and brokers.
It’s not all bad news, as the government will allow taxpayers to spread the extra tax bill on the transition profits after deducting any previous overlap profits over five years. However, any remaining untaxed amounts will be taxed immediately if your business ceases within five years. You can also elect to accelerate the tax on transitional profits.
There are some odd quirks to the rules for new businesses starting just before 6th April 2023 and existing businesses whose accounting year is 31st March 2023. The portion of profits falling in 2023-24 is ignored and taxed the following year.