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Tax year changes that sole traders need to know!

Attention all tradesmen and sole traders! From 6 April 2024, HMRC is rolling out new rules that will impact how you manage your accounts for tax purposes. Known as the Tax Year Basis or Basis Period Reform, these changes aim to streamline the tax system and reduce administrative burdens. 

We dive into what you need to know to navigate this transition smoothly.

Aligning accounting periods with the tax year

Currently, sole traders, freelancers and contractors have the flexibility to choose their own 12-month accounting period. However, under the new rules, your accounting period will need to align with HMRC’s official tax year, which runs from 6 April to 5 April.

This shift is part of the government’s broader initiative to rationalise the tax system and bring down administration costs. By aligning accounting periods with the tax year, HMRC argues that it will simplify tax filing for self-employed individuals, reducing errors and providing greater clarity around tax liabilities.

The impact on income tax and self-assessment

If you’re a sole trader, you’re likely familiar with the Self-Assessment Tax Return process for reporting your Income Tax and National Insurance (NI) contributions. While sole traders pay Income Tax and NI similar to employed workers, the management of these taxes more closely resembles business tax administration.

Under the current system, changes to Income Tax rates or personal allowances automatically apply to employed individuals from 6 April. However, for self-employed workers with accounting periods different from the tax year, the application of new rates can be more complex. The Tax Year Basis reform aims to create a more consistent Income Tax regime across employed and self-employed individuals.

Navigating the transition period

The 2024/25 tax year will be the first where the Tax Year Basis will be in full effect, with the 2023/24 tax year serving as a transitional period. If you’re one of the estimated half a million sole traders or partnerships affected by these changes, here’s what you need to prepare for:

  • For the 2023/24 tax year, you’ll need to pay Income Tax and NI for your last complete 12-month accounting period, as per usual.
  • Additionally, you’ll need to pay Income Tax and NI for the period between the end of your accounting period and 5 April 2024, to bring you in line with the new tax year basis.

Don’t worry, though – any additional tax owed on profits during this transition won’t need to be paid all at once. HMRC is allowing affected individuals to spread these payments over the next five tax years. Plus, you may be able to claim Overlap Relief if the accounting period changes for 2023/24 result in double taxation on the same profits.

Proactive planning for a smooth transition

As a tradesman, proactive planning is key to ensuring a smooth transition to the new Tax Year Basis. Consider taking the following steps:

  1. Review your current accounting period and assess how it will be impacted by the alignment with the start and end of the year.
  2. Consult with your accountant or tax advisor to understand the specific implications for your business and to develop a tailored strategy.

  3. Stay organised with your record-keeping and ensure your accounts are up to date to facilitate accurate tax calculations during the transition.

  4. Consider setting aside funds to cover any additional tax liabilities that may arise during the 2023/24 transitional year.

  5. Stay informed about any further guidance or support measures introduced by HMRC to assist sole traders through this change.

Tradesman Talk

Change can be daunting, but with knowledge and preparation, you can confidently navigate the upcoming Tax Year Basis reform. As a self-employed tradesman, understanding how these changes will impact your tax obligations is vital for maintaining a thriving business.

At Tradesman Saver, we’re committed to keeping you informed and supported through this transition, not only in navigating tax changes but also in protecting your business with our comprehensive tradesman insurance. Our team is here to provide guidance and answer any questions you may have about the tax year changes, as well as to help you find the right insurance coverage to protect your livelihood.

We want to hear from you! How are you preparing for the Tax Year Basis reform? What strategies are you implementing to ensure a smooth transition? Share your thoughts and experiences in the comments below.

Darragh Timlin

With over 25 years’ experience, Darragh is an expert in all things insurance. Starting his career in commercial property underwriting, Darragh has worked for a number of global insurers and is now Managing Director of Tradesman Saver, part of the wider Henry Seymour Group.

All articles by Darragh Timlin

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