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Basis period

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The basis period is the timeframe during which a single trader computes their annual tax obligations. You assess both your earnings and expenditures throughout this 12-month period. Self-employed individuals have the flexibility to choose their own base period.

Am I allowed to choose any base period?

Here are the several eras available for selection:

  • The ordinary tax year runs from April 6th to April 5th of the following year.
  • From April 1st to March 31st of the following year.
  • A customised start and end date such as January 1st to December 31st.

Using a custom period might be intricate. An frequent concern is the possibility of being overtaxed and needing to request a refund. This occurs because not all base periods align completely with the standard tax year. It is advisable to use a custom basis period only when there is a valid justification.

What does this signify in practice?

Choosing your own basis period for starting your firm may result in double taxation. You may still take it back, but it adds an unnecessary level of difficulty. You may reclaim repeated tax by applying for Overlap Relief via HMRC.

Here is the process.

Be informed that the regular tax year runs from 6th April to 5th April. Starting a company on November 5, 2022, with a base period from November 5 to November 4 may result in a tax computation that may differ from your expectations. The event takes place from November 5, 2022, until April 5, 2023.

The next taxable period for calculation will be from 5th November 2022 to 4th November 2023, which is the same as the one previously computed. The next date range will be from 5th November 2023 to 4th November 2024, and further ranges will follow accordingly.

The overlap period from November 2022 to April 2023, when you make double payments, is why many individuals want to stick to the ordinary tax year.

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