News

In this April issue we highlight some of the key tax changes that take effect from the start of the new tax year. Unfortunately, most of the income tax and national insurance thresholds continue to be frozen, resulting in an increasing number of higher rate taxpayers. The major exception is the welcome increase in the threshold for the High Income Child Benefit Charge (HICBC). The further reduction in the rates of national insurance contributions for employees and the self employed will take effect from 6 April and is a move towards a possible future abolition. The self-employed will see important changes to how they compute their profits from 2024/25 with “cash accounting” being the default method unless they opt for the accruals basis. The mechanism for assessing those profits also changes from 6 April 2024 when the business results arising between 6 April and the following 5 April will be taxed, which will mean apportioning results where the business year end does not correspond with the tax year. As far as limited companies are concerned, there is no change in the rates of corporation tax from April 2024. There are however further changes to R&D tax relief which will apply to accounting periods commencing on or after 1 April 2024. Remember also that the capital gains tax annual exemption reduces to just £3,000 for each taxpayer for gains made in 2024/25, but the higher rate on residential property gains reduces from 28% to 24% as announced in the Spring Budget.

The changes to the High Income Child Benefit Charge (HICBC) announced in the Spring Budget have now been incorporated into the latest Finance Bill and are scheduled to take effect from 6 April 2024. The increase in the threshold for the tax charge was good news, although many were lobbying for the charge to be removed completely. HICBC is intended to claw back child benefit where the higher earner in a relationship has adjusted income in excess of £60,000 (£50,000 up to 2023/24). The claw back rate will then be 1% for every £200 of net income in excess of £60,000 with full recovery of child benefit where net income is £80,000 or more. Rather than pay the tax charge, many couples have chosen not to claim child benefit in recent years. It is estimated that some 180,000 couples eligible for child benefit will no longer be caught by the HICBC and should restart their claims from 6 April 2024. This can be done by using an online claim form. **Example** Fred and Wilma have 2 children for whom they are eligible for child benefit. Fred is the higher earner and his income was £68,000 in 2023/24, which is scheduled to increase to £70,000 in 2024/25. In 2023/24 the HICBC would have been 100% of the child benefit received. Their child benefit for 2024/25 is £25.60 for the first child, then £16.95 for each additional child = £42.55 x 52 = £2,212.60 p.a. Based on Fred’s £70,000 net income there would be a 50% HICBC for 2024/25 of £1,106.30. **Planning** An individual’s pension contributions and payments to charity under Gift Aid have the effect of reducing net income for the purposes of HICBC. Salary sacrifice arrangements agreed with the employer can also be effective in reducing net income for HICBC purposes.

Cash accounting was introduced as a measure to make it simpler for small businesses to prepare their accounts for tax purposes. It previously only applied to businesses with turnover up to £300,000 but, from 2024, will be the default method for sole traders and partnerships. It will not apply to partnerships with corporate members or limited liability partnerships. Businesses affected will be able to opt out of cash accounting and prepare their accounts in accordance with Generally Accepted Accounting Practice (GAAP), which means making adjustments for accruals, prepayments and other differences. It will also be possible to subsequently opt back into cash accounting. There are transitional rules to ensure that income and expenses are not included twice or omitted. Please contact us to discuss the impact that this change may have on your taxable profits.

The method of taxing the profits of unincorporated businesses changed significantly in 2023/24 and will also change from 2024/25 onwards. This was originally intended to align with the introduction of Making Tax Digital for Income Tax Self-Assessment (MTDITSA), which will now start to be phased in from 2026/27. Under the old basis of taxing profits, a sole trader or member of a partnership was taxed on their share of profits of the business’s accounting period ending in the tax year. For 2022/23, the last tax year when that basis applied, profits of year ended 31 December 2022 would have been taxed that tax year. Unless that business changes its accounting date, the profits assessed in 2024/25 would be the profits arising between 6 April 2024 and 5 April 2025 i.e. 9 months of the profits from year ended 31 December 2024 plus 3 months of the profits for year ended 31 December 2025. As the 2024/25 self-assessment tax return needs to be filed by 31 January 2026, it is highly likely that the profits for the later period would need to be estimated and subsequently revised. As a result of this complication, many businesses decided to change their accounting year end to 31 March or 5 April so that it corresponds with the tax year. **The Transitional Year 2023/24** A further complication with the change in the basis of assessment is the calculation of profits in 2023/24, the “transitional year”, which seeks to transition from the old ‘current year’ basis to the new tax year basis. The rules in 2023/24, where the business has a year end that doesn’t correspond with the tax year, seek to tax the profits from the day after the end of the period taxed in 2022/23 until 5 April 2024. A business preparing accounts to 31 December each year would have a 15 month period from 1 January 2023 to 5 April 2024 potentially taxable in 2023/24. However, the 3 months’ profits in the period 1 January 2024 to 5 April 2024, less any overlap relief, is not all taxed in 2023/24 but spread over 5 years, unless the taxpayer elects to be taxed on a higher amount. If, in the above example, the sole trader makes profits of £120,000 in year ended 31 December 2024 then £30,000 less any overlap relief (typically from the early years when some profits were taxed twice) would be spread over 5 years. Assuming no overlap relief, an extra £6,000 profits would be added to the profits assessable from 2023/24 to 2027/28 unless the individual elects to be assessed on a higher amount, in which case the balance of the £30,000 would then be spread over the remaining years to 2027/28. This is not at all straightforward and we can work with you to calculate the transitional profits and advise you of your tax liabilities going forward.