Sole traders
Basis of assessment – The 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 had a year-end between 31 March and 5 April have been unaffected by the change.
Under the transition year rules:
– Up to 23 months’ worth of profits come into charge in 2023/24, with overlap profit (which usually arose on commencement of trade) being set off against the additional months’ profits.
– The extra profits are 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.
‘Cash basis’
For 2024/25 and subsequent years, cash basis is the default method of calculating taxable profits.
If you wish to elect out of the cash basis, 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 2025/26 can be offset against your other income of that year and/or 2024/25, 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.
Making Tax Digital for Income Tax (MTD IT)
MTD IT is being phased in for landlords and the self-employed from 6 April 2026. This will involve quarterly reporting. Those with qualifying income above £50,000 must enrol from 6 April 2026. Once enrolled, this will involve quarterly reporting of income and expenditure for income tax purposes to HMRC via MTD compatible software.
The reporting quarters will be to 5 July, 5 October, 5 January and 5 April, irrespective of your accounting year-end. However, taxpayers with an accounting date of 31 March will be able to operate MTD from 1 April in the first year of operating MTD.
A finalisation statement (effectively a tax return) will also need to be sent after the year-end. MTD IT will thus greatly increase the compliance burden of any business affected.
Those with qualifying income above £50,000 must enrol from 6 April 2026.In deciding whether an individual needs to register for MTD IT for a tax year, HMRC will look at the tax return that should have been submitted in the January before the tax year being considered.
Qualifying income is gross (combined) income of any property business and/ or sole tradership.
Tax 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.
• Where the cash basis applies, bringing forward business expenditure into the current tax year will reduce profits for that year and therefore tax liabilities.
• l If you had transition profits that are being spread over 5 years, make sure you budget for the tax that will be payable on these profits.
• Do not underestimate the extra reporting responsibilities that MTD IT will bring and, in particular, make sure you have adequate MTD-enabled software.
