Thousands of self-employed workers face higher tax bills

Are you a sole trader or a partner? Do you draw up your accounts on a different date to either 31st March or 5th April? If so, you’ll be one of over half a million self-employed workers who’ll soon be facing a higher tax bill.

Why will self-employed workers face higher tax bills?

Many self-employed workers will face higher tax bills because of a rule change by HMRC.

Currently, some 528,000 self-employed workers report their profits on an accounting year that doesn’t end on either 31st March or 5th April. For example, many will have an accounting year that begins on 1st January and ends on 31st December.

New HMRC rules mean that, from April 2024, these people will need to report their taxable profits up to 5th April, regardless of when their current accounting year ends.

We’re currently in a ‘transition year’ to the new system. During this period you can be taxed on more than 12 months’ profit. For example, if the end of your current tax year is 30th April, you can be taxed on up to 23 months of profit. This will be due in January 2025.

How will the new system work?

Essentially, you’ll need to declare your business profit from the day after the end of your accounting year up to 5th April 2024.

To make this less complex, it may be a good idea to keep two sets of accounts during the transition period. Speak to an accountant at THP if you need help with your accounts. To make life simpler in the future, it may be a good idea to change your tax year so that it aligns with HMRC’s.

Do self-employed workers have to pay the extra tax in one go?

While it will be inconvenient – or difficult – for many self-employed workers to pay extra tax, there are two things you can do to soften the blow.

Firstly, you may be able to claim something called overlap relief. This relief is available for any income that got taxed twice when you started self-employment. You can get help finding your overlap relief figure here.

Secondly, HMRC allows you to spread your additional, transitional profit over five years. It will do this automatically, unless you ask to ‘accelerate’ the charge. This allows you to pay off more of the tax earlier, meaning you pay less in future years.

Why has HMRC made these changes?

HMRC believes the new system will create a ‘simpler, fairer and more transparent set of rules’. In the future, the system should ensure profits are taxed only once, regardless of a self-employed worker’s financial year.

Originally, the taxman wanted to bring in the new system in a year earlier. However, after protests from many self-employed workers, accountants and other professionals, the changes got pushed back 12 months.

What should self-employed workers do next?

If you are going to be affected by the new rules, the most important thing to do is make sure you have enough cashflow to cover the extra tax. It’s also a good idea to get advice. Some people may find it advantageous to change their financial year dates, while others won’t. If you’d like any help, or you have any questions, speak to a member of the THP team today.