Basis period reform and non-trading income

Basis period reform has changed the way in which partners (and sole traders) are taxed on their profits from the business, impacting those where the accounting period does not align with the tax year.

Affected businesses will now be familiar with the workings of the new rules in relation to trading profits, and the potential cashflow implications in terms of tax payments, which are covered in more detail in our previous article outlining a summary of the changes.

However, there is a slight variation of the new rules which applies to non-trading income arising within a partnership (for the purposes of this article we will refer to partners/partnerships but the same rules apply to sole traders).

As a recap, as a result of transitioning to the new basis period rules the “additional net profits” (see previous articles for explanation) that arise to a partner are able to be spread equally over five tax years from 2023/24, but this easement only applies to trading profits.

Non-trading Income

The spreading provisions are not available for a partner’s share of non-trading income, which will include bank interest and may include rental income. This will result in excess of one year’s worth of non-trading income being assessed to tax in the 2023/24 tax year (for April year ends this will equate to 23 months of non-trading income).

The impact can be illustrated with the following example:

• A partnership with a 30 April year end.
• A partner who pays tax at the additional rate (45%).
• They receive £50,000 per year share of the partnership’s non-trading income.
• Their brought forward non-trading overlap profit totals £10,000.

In 2023/24, the partner would be assessed on £86,584 (£50,000 + (£50,000 x 341/366) - £10,000)), an additional £36,584 of non-trading profit taxed in the year, when compared to the old regime (£50,000), increasing their tax payment due on 31 January 2025 by £16,463.

In turn, this would also push up their payments on account for 2024/25, which would then need to be reviewed to ensure they aren’t excessive and an opportunity to improve cashflow is not missed.

Conclusion

Many partnerships will have seen a recent jump in interest payments, and subletting office space is also relatively common. With this in mind, non-trading income could represent a sizeable percentage of many partners’ overall profit share. Care should be taken to ensure sufficient cash is reserved for the accelerated tax.

For further information, please get in touch with Nicky Owen or your usual Crowe contact.