If you are an employee/director in a company or a salaried partner in a partnership (or LLP) you will be taxed, broadly, on the salary and any benefits paid to you during the tax year.
Up to 6 April 2023, partners in a partnership and members in an LLP were taxed based on their tax adjusted profit shares for the account year which ended in a particular tax year. For example the profit from the accounts ending 30 April 2022 would be taxable in 2022/23. There were special rules if someone joined or left a partnership in a tax year.
However, partners and members could see a major change to their tax from 6 April 2023.
For businesses with accounting years ending between 31 March and 5 April there will be no change to the way partners and members are taxed.
But if your business uses another year end date for its accounts the “Basis Period Reform” rules could have a significant impact on you; both in the technical complexity of calculating your taxable profit shares allocated to a tax year, and also in accelerating when the tax on your profit share is due to HM Revenue & Customs.
From 6 April 2024 onwards you will be taxed based on profits arising solely in the tax year, regardless of when your accounting year end falls. Where the accounting year isn’t in line with the tax year (i.e. accounts year end isn’t between 31 March and 5 April), you will need to apportion the tax adjusted profits from two accounting years to arrive at your taxable profits for 2024/25.
In 2023/24 there is a “transitional year” to prepare for this change. You will be taxed on your profit share from the accounting year that ends in the year to 5 April 2024. You will also be taxed on your “transitional profits”.
Transitional profits cover the period from your year end to 5 April 2024 less any overlap profits available for relief. Transitional profits can be spread over up to five years and careful planning will be needed to make the most of this aspect to mitigate the impact of accelerated tax payments on your cashflow.
Please speak to us if you need assistance understanding your tax position and we will be pleased to help.