ACCA ATX ^UK Syllabus A1. Income tax - Basis of assessment for self employment income - Notes ^{1 / 8}

The basis of assessment for self-employment income

A tax year runs from 6 April to 5 April.


The current tax year 2024/25 runs from 6 April 2024 to 5 April 2025.

Profits are taxed on a tax year basis. This means that trading profits from the 06/04/24 until 05/04/25 will be taxed in the tax year 2024/25.

Trading profits will have to be time apportioned if accounts are not made up to 5 April (or 31 March).

Example:

Anaya makes up her accounts to 30 June each year. Her trading profits are:

For the tax year 2024-25, Anaya will be assessed on profits for the period 6 April 2024 to 5 April 2025. The assessment is therefore £67,550 ((61,700 x 3/12) + (69,500 x 9/12)).

Transition profits

The previous tax year (2023/24) was the transitional year from the old basis of assessment to the tax year basis.

A sole trader or partner who did not prepare accounts to 5 April (or 31 March) might have had higher profits for 2023/24 compared to if the old basis had continued to apply. In these circumstances, the sole trader or partner was only assessed on the lower profits calculated under the old basis. 

The excess profits, called the transition profits, are taxed by spreading them over a period of five years starting with the tax year 2023/24. For example, the transitional assessment for the tax year 2023/24 was £110,000, but the assessment would have only been £60,000 if the old basis had continued to apply. The transition profits are £50,000, with £10,000 (50,000/5) assessed for each of the tax years 2023/24 to 2027/28. 

NOTE: You are not expected to calculate transition profits, but you do need to know how a given amount of transition profit is subject to tax during any of the tax years 2024/25 to 2027/28. 

Transition profits are included in the income tax computation of a sole trader or partner as a separate entry. They can impact on the availability of the personal allowance.

An election can be made to accelerate the taxation of the transition profits. This election is not examinable at TX-UK but it is examinable at ATX-UK. 

An election to accelerate the taxation of the transition profits might be made, for example, so that an amount of transition profits would be taxed in a lower tax band than would be the case under the standard treatment. 

The downside being that the taxation of the profits would be accelerated because the profits would be taxed in an earlier year. 

Where such an election is made, the amount of untaxed transition profits carried forward will be spread evenly over the remaining years of the five-year period. 

Where relevant, a question in the ATX-UK exam will provide: 

- the amount of transition profits arising in the tax year 2023/24; and 
- the amount which has already been subject to income tax.