Income Tax Reform

Over the coming years there are some significant changes happening to income tax.

Whilst these may not appear in the headlines, as they are not direct changes to tax rates, thresholds or reliefs, they are nevertheless significant and need to be understood and planned for. 

Basis Period Reform

In advance of the MTD introduction, another change is already underway. 

From the tax year ended 5th April 2024 the rules that determine the profits of a self-employed business or partnership that are taxed in a tax year are changing.

Up to and including the 2022/23 tax year the taxable profits were based on the accounting period that ended in the tax year.

However from the 2024/25 Tax year onwards the profits taxed in a tax year will be those of the year itself, i.e. the period 5th April to the following 6th April, regardless of the accounting period used.

Therefore if the accounting period is not aligned to the tax year, then an apportionment of profits from two accounting periods will be needed.

The 2023/24 tax year is a transitional year in which both the profits for the businesses usual accounting period and the additional period to 5th April 2024 are taxable in the one tax year.

There some options available to mitigate the additional liability that can arise in this transitional year, which may be substantial for some.

If your accounting period is not the tax year, then speak to your adviser about how these basis period changes will affect you.

‘Making Tax Digital’

From April 2026 the way in which self-employed and landlords report their income to HMRC is changing. 

In a phased rollout they will move from the current Self-Assessment Tax return system into a new MTD reporting system. 

This new system will, for the first time, require records to be kept digitally and for in-year quarterly submissions to be made to HMRC. Followed by a final end of year submission.

This is the biggest change to income tax reporting since the introduction of self-assessment in the 1990s. 

With the requirement for digital records and more frequent submissions it is important that these changes are planned for. Please do reach out and talk to us about how these changes will affect you.