Tax season can be stressful, but understanding the new rules for 2023/24 can make it much smoother. Whether you’re self-employed, a side-hustler, or simply trying to make sense of your dividend income, here’s a detailed guide to the key changes that might impact your Self-Assessment Tax Returns.
Big Changes to How Self-Employed Profits Are Taxed
Starting from 6 April 2024, if you’re a sole trader or part of a partnership, your profits will be taxed based on the tax year, which runs from 6 April to 5 April. This is a significant shift from the previous system, where profits were taxed based on your business’s accounting year. But the transition in the 2023/24 tax year brings unique challenges and opportunities.
What Does the Transitional Year Mean?
The 2023/24 tax year is a “transitional” period, and this could mean higher taxable profits for many self-employed individuals. Here’s how it works:
- Your profits for the year will be calculated in two parts:
- Standard part: The profits you earned in the 12 months up to your usual accounting date.
- Transitional part: The extra profits earned from your accounting date up to 5 April 2024.
This means some self-employed individuals will have to report more than 12 months’ worth of profits in one tax year. If this sounds concerning, you’re not alone. A lot of the early feedback on these most recent changes has been regarding this element, but there are ways to reduce the impact.
Overlap Relief to the Rescue
If you’ve been self-employed for a while, you may have accumulated “overlap relief.” Overlap relief arises from the early years of your business when you may have been taxed on the same profits twice due to the way accounting dates work. Now, you can use this relief to offset your additional taxable profits for 2023/24.
Spreading the Pain
If your transitional profits are still significant after applying overlap relief, there’s a helpful option: spreading the extra profits over up to five years. This way, you won’t face a massive tax bill in one go. For example, if you have £50,000 in additional transitional profits, you could spread them across five tax years, adding £10,000 to your taxable income each year.
What Should You Do?
It’s crucial to think ahead and plan for this change. If you feel unsure about how these rules apply to you, speaking with a tax professional could save you money and stress. They can help you decide whether to spread your profits or pay them all in one go, depending on your financial situation.
Higher Income Threshold for Self-Assessment
For people who have income from a job (PAYE income), there’s some good news: the threshold for filing a Self-Assessment Tax Returns has increased from £100,000 to £150,000 as of 6 April 2023. This means fewer people will need to file returns just because of their employment income.
But Watch for Exceptions
Even with this higher threshold, you might still need to file Self-Assessment Tax Returns if:
- You or your partner receive child benefit and have income over £50,000 (note that this will increase to £60,000 from April 2024).
- You’re self-employed and earn over £1,000.
- You have rental income or other untaxed income, like dividends, that exceed the annual allowance.
Why Do People File Even When They Don’t Have To?
You might be wondering why some individuals continue to file Self-Assessment Tax Returns even if it’s not mandatory. The answer is simple: to ensure they’re paying the correct amount of tax. This can be particularly relevant if you have fluctuating income or multiple income streams.
Automatic Cancellation by HMRC
HMRC may cancel your Self-Assessment registration if you no longer meet the criteria. However, if you want to keep filing (perhaps to claim tax reliefs or to check your tax position), you’ll need to re-register each year. It’s important to stay aware of your tax obligations and make sure you’re not missing out on any potential benefits.
Reporting Side Hustle Income on Your Self-Assessment Tax Return
More and more people are earning extra cash from side hustles, whether it’s selling handmade crafts on Etsy or flipping items on eBay. From January 2025, digital platforms like these will have to report sellers’ income to HMRC.
What Does This Mean for You?
Although this isn’t a new tax rule, it does mean that HMRC will have more visibility over who is earning what. If your income from these platforms exceeds £1,000 in a tax year, you’re required to report it, even if it’s just a “side hustle.”
What Counts as Income?
Income from side hustles includes:
- Selling goods online (e.g., eBay, Etsy, or Vinted)
- Providing freelance services (e.g., graphic design or content writing)
- Renting out property, including Airbnb lettings
It’s important to keep good records of your income and expenses. Even small costs like postage fees or the cost of materials can add up and reduce your taxable profit. If you’re earning close to or over £1,000, think about organizing your records now to avoid a scramble later.
Keeping Good Records
The key to managing side hustle income is solid record-keeping. Keep a log of every sale, expense, and any related receipts. This will make your life a lot easier when it’s time to file your return.
Lower Allowances for Dividends and Capital Gains
If you earn income from dividends, there are significant changes to note. The annual dividend allowance dropped from £2,000 to £1,000 for the 2023/24 tax year. From April 2024, it’ll be halved again to just £500. This means more people will need to report dividend income and potentially pay tax on it.
Capital Gains Tax Exemption Reduction
The tax-free amount for capital gains took a hit, too. It went from £12,300 in 2022/23 to £6,000 in 2023/24 and will be further reduced to £3,000 in 2024/25. If you’ve sold shares, property, or other investments, you may now have gains that need to be reported.
Planning Ahead Can Save You Money
With these lower allowances, tax planning is more crucial than ever. If you’re thinking about selling assets, you may want to consider the timing to take advantage of higher exemptions or spread your gains over multiple tax years.
Furnished Holiday Lets (FHL): Changes Coming Soon
The rules around furnished holiday lets (FHL) are changing, and from 6 April 2025, you won’t be able to claim the same tax benefits as before. This affects income tax, capital gains tax, and capital allowances.
Anti-Forestalling Rules
Anti-forestalling measures kick in from 6 March 2024 to prevent people from selling their FHL properties to family members and claiming tax relief. If you’re thinking of selling or making changes, be aware of these restrictions.
What If You Own a Furnished Holiday Let?
You may need to rethink your tax strategy. Once the scheme ends, you’ll no longer have to separate income from FHL and non-FHL properties, which could simplify your tax filing but also increase your tax liability.
Cash Basis Becomes the Default in 2024/25
Starting from the 2024/25 tax year, the cash basis will become the default way of calculating profits for self-employed individuals and partnerships.
What Is the Cash Basis?
The cash basis is a simpler method of accounting where you record income when it’s received and expenses when they’re paid, rather than when they’re invoiced or accrued. This can make things easier for smaller businesses, but it’s not always the best option.
Should You Opt Out?
The cash basis might not work well if:
- You have high levels of unpaid invoices.
- You need to claim interest on bank loans or other business expenses.
- You run a business that carries a lot of inventory.
It’s worth talking to us to see if sticking with the accruals basis might benefit you.
These changes might seem complicated, but they don’t have to be overwhelming. If you’re not sure how they affect you, getting professional advice could be a wise move. Staying on top of your tax situation not only helps you avoid penalties but could also save you money in the long run.
Want to discuss your self-assessment responsibilities further? Get in touch today to see how we can help.
