Choose your year end wisely. When you start a business as a sole trader or partnership choosing your year end can have a dramatic affect on your tax payments.

There are special tax rules that identifies the profits that will be taxed in the early years

Generally if your profits are rising then if you elect for a 5 April year end you will probably end up paying a lot more tax earlier than if you decided to to elect for a 30 June year end

Let’s work through a quick example to illustrate this point:

Andrew sets up a consultancy business on 1 January 2016 and elected to have a 5 April 2016 year. His profits were as follows: £8700 to 5 April 2016, £33,425 to 5 April 2017, £67,875 to 5 April 2018 and £80,000 to 5 April 2019 then:

2015/16   Profits to 5 April 2016  £8,700

2016/17   Profits to 5 April 2017  £33,425

2017/18   Profits to 5 April 2018  £69,025

2018/19   Profits to 5 April 2019  £80,000

A total of £191,150

If Andrew had elected for his first accounting year end to be 30 June 2017 and had the same profits i.e. £50,000 to 30 June 2017, £80,000 to 30 June 2018 and 30 June 2019 then the results would be very different:

2015/16 Profits to 5 April 2016 £8,700 i.e. £50,000 x 95/546

2016/17 Profits to 5 April 2017 £33,425 i.e. £50,000 x 365/546

2017/18 Profits to 5 April 2018 £33,425 i.e. the profits for the 12 months ended 30 June 2017 £50,000 x 365/546

2018/19 Profits to 5 April 2019 £80,000 i.e. the profits for the year ended 30 June 2018

A total of £155,550

So a lot less tax is paid earlier for a 30 June 2017 year end as shown in this example

There is also overlap relief to be considered as well which I will not expand in this article as I want to demonstrate the importance of the year end and how it affects the tax payments

It is always important before you take any action that you obtain professional advice. If you have any questions in respect of the above, then please do not hesitate to contact our tax experts by sending an email to kevin@kwaccounting.com