Sole trader ― accounting period end planning

Produced by Tolley

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Sole trader ― accounting period end planning
  • Trading expenses
  • Scottish taxpayers
  • Types of expenditure to bring forward
  • Bonuses and pension contributions
  • Legal and professional fees and other administrative costs
  • Stock and work-in-progress
  • Bad debts
  • Provisions
  • Costs to incur before the period end
  • More...

Sole trader ― accounting period end planning

This guidance note considers some of the planning points in relation to the accounting period end. This includes:

  1. planning work prior to the year end

  2. considerations in finalising the accounts

Trading expenses

Prior to the end of the year, it may be possible to consider the timing of significant items of income or expenditure. There are two potential advantages in bringing expenditure forward into a tax year:

  1. tax relief is received at the earliest opportunity

  2. relief may be received at a higher rate

These are essentially two different points, but they should be considered at the same time.

It is difficult to accurately predict profits a year in advance, but it may be possible to estimate which rate the taxpayer will fall in. In some cases, there may be specific reasons for a change, eg the turnover may be increasing, or the taxpayer may be winding down the business.

In order to effectively advise a trader whether to bring forward expenditure, the marginal rates of tax and National Insurance Contributions (NIC) need to be considered. This can be complicated when considering multiple sources of income and care needs to be taken in considering the effects of earned income pushing savings income, dividend income or capital gains into higher rates of tax. For this reason, it is sensible to draft calculations and state the assumptions regarding other income and other relevant factors. This gives the taxpayer an opportunity to correct any assumptions which maybe erroneous. However, where a self-employed taxpayer has savings and dividend income which is covered by their respective nil rate bands, and no complicating factors, an estimate can be made using the applicable effective rates.

The following table shows the thresholds and effective rates for income tax and NIC (for non-Scottish taxpayers):

Effective rate (income tax and Class 4 NIC)2021/22 (£)2020/21 (£)
Up to lower profit limit0%0–9,5680–9,500
Up to personal allowance9%9,569–12,5709,501–12.500
Basic rate band29%12,571–50,27012,501–50,000
Higher rate

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