How to Effectively Deal With the Changes to Personal Tax Liabilities for LLP Partners

There has been a pretty significant change to the basis period used to calculate income tax for LLP partners that comes into effect from April 2024 (with a transitional period in the 23/24 tax year).

The big news is that individuals and partners will be taxed based on the profits made during the tax year rather than the accounting period ending in the tax year.

Despite the government stating that the reason for this change is to make the taxation process ‘simpler, fairer and more transparent’, for reasons we’ll explore now, this change is still going to increase the tax liability for thousands of LLP partners up and down the UK. 

In this article, we’ll explore what changes have been made to the basis period, what this means for LLP partners, and we’ll explore ways in which you can mitigate any increased tax liability that you are now facing as a result of these changes.

What is the change & who does it impact? 

This basis period reform only applies to self-employed individuals, including LLP partners. 

The change itself is quite simple to explain:

Up until now, self-employed individuals and LLP partners would pay tax based on the profit made during their chosen accounting period that ends during the tax year itself. 

So, if your business’s chosen accounting period is from 1st Jan to 31st December, then you would previously pay your tax based on the profit made during this 12 month period, not the tax year (which of course runs from 6th April to 5th April the following year). 

However, the new rules that have come into effect have changed this.

Now and moving forward, self-employed individuals and LLP partners must pay tax based on their profit made during the tax year (I.e April to April), irrespective of what 12 month period they use for their accounting.

An example of how it will look:

Let’s take an example of a business that uses an accounting period of Jan 1st to Dec 31st. 

Here, we can clearly see how the tax liability of this business has increased during this tax year.

The business is having to pay tax and earlier than expected, which could also bump individuals into a higher marginal tax bracket.

In the next tax year, and all following years, this business will now be taxed across 2 of its accounting years. For example:

“What if I already prepare my accounts aligned with the tax year?” If this is you, then fortunately there won’t be any impact to your business!

Transitional Period & Potential Problems

The further away your accounting year end is from the end of the tax year, the bigger the potential tax liability arising from this change. 

In addition, businesses with a particularly late year end to their accounting period will be hard pushed to get everything in order and settled before the Jan tax deadline.

The tax return deadline for 23/24 will be the 31st of Jan 2025, for all businesses. So, if your business has a year end in December, then you will have 1 month to get all of your accounts together and determine the profit level on the next 3 months of the following accounting year (i.e up until the end of the tax year in April). 

This is something that, correctly, the government accepts is unrealistic for many businesses. So, to help ease the burden, HMRC are allowing you to make any amendments to the figures posted up to 12 months after this.

There are also other changes to the legislation that the government has created that will make this period easier to manage for businesses & individuals that are impacted the most. You can read more about these on the government website. 

How to deal with this increased tax liability as an LLP partner?

Despite the government’s best efforts, these changes will still be creating headaches for a lot of self employed individuals and LLP partners across the UK. 

Certain businesses will be facing a much higher tax bill in the transitional 23/24 year and will have to make payments much sooner than they would have expected or planned for. 

So, what options are available to help your business through this transitional period?

First things first, are you already paying too much tax? 

Many LLP partners are putting an unnecessary strain on their cashflow by not optimising their accounts in time for the tax season. 

There are lots of small things, such as business travel costs or corporate events, that you can expense against your profit, and thus reduce your tax liability. Check out our article from last month for more tips on this and to learn how to get prepared for the January tax deadline.

Consider a business loan to cover the tax bill 

If you’re facing a larger than normal tax bill, this can put a lot of unwanted pressure on your cashflow situation. 

Depending on how healthy your finances are, the impact of this could range from slowing down your investments into the business over the next quarter to seriously straining the financial health of the company. 

A loan from Acorn Business Finance can help relieve you of this burden and ensure that HMRC is paid on time, instead of entering into a full payment arrangement plan with HMRC.

Business loans are the largest area of our business. We will work with you to come up a bespoke financial solution to help you get through this tax legislation change with a minimal impact on your operations. 

Acorn is all about providing a personal yet efficient service, and you can expect a decision on the loan within 48-72 hours.

If you’d like to discuss what finance options are available for your business, book a call back with our team.

Consider changing your business accounting period

If you have the flexibility to change your accounting year end, then it will be much more straightforward for your business to start aligning your accounting period with the tax year moving forward.

It’s important to note that there is no obligation to do this, and this may not be an appealing option to some businesses who may have strategic/commercial reasons behind their chosen accounting period, but there’s no doubt that it will make things easier for your accounts team over the years ahead.

Summary for reducing the tax burden for LLP partners

In facing the challenges brought by the changes to personal tax liabilities for LLP partners, it’s crucial to explore practical solutions that align with your business’s unique needs.

While adapting to the new basis period reform may pose challenges, it’s reassuring to know that options exist to ease the transition. By optimising your accounts to reduce your overall tax burden and considering a tailored business loan, such as those offered by Acorn Business Finance, you should be able to navigate this increased tax liability with strategic financial planning.

Additionally, contemplating a shift in your business accounting period, though not obligatory, emerges as a potential avenue to simplify financial management.