What the self-employed basis period change means for pension funding

In April 2024 the government will be introducing a new system for submitting Self-Assessment tax returns, called Making Tax Digital (MTD). If you are self-employed, this overhaul to the tax system will apply to you.

The new rules will align the reporting year with the tax year (5^th April) and requires self-employed individuals to maintain digital records of business income and expenditure and submit the statements to HMRC on a quarterly basis. You will then file an End of Period Statement (EOPS) by 31^st January following the tax year end which will also factor in other sources of income (eg. interest and dividends), capital gains and any allowable reliefs and adjustments¹.

The current 2023/24 tax year will be a transitional year. If you currently have an accounting period that finishes early in the tax year (ie. May) then you have a longer period of time before you have to pay the tax owed, whereas this change would mean that you could have to pay tax on up to 22 months of income being reported at the same time (the previous reporting year and the new reporting period)².

HMRC are aware that this may place a larger tax burden upon the self-employed and there are reliefs available which may allow you to spread the additional tax liability over up to 5 years³.

The potential spike in income during this transitional year also presents an opportunity to increase pension funding (and the associated tax relief). If you are affected by this change, you should contact your accountant to check how this will be impact on your tax position and if this presents.

As your tax bill could be spread out resulting in lower annual payments, you may have surplus income. This could be a good time to deposit some of those funds into your pension pot (to address gaps in your NI contributions or simply enhance your retirement funds) which as a self-employed person you may have neglected or had insufficient funds to administer to your pension pot.

1.https://www.gov.uk/government/news/government-announces-simplified-tax-reporting-for-self-employed-and-small-businesses

2-3.https://techzone.abrdn.com/anon/public/pensions/self-employed-basis-periods?opendocument&utm_campaign=ADV-TEC-Not-Eligible 14022023&utm_medium=email&utm_source=Eloqua&utm_content=CSLAR000000213118

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