What is ‘overlap relief’?

• This can occur when you have an accounting date ending other than between 31st March and 5th April.
• It usually arises at the time when you first commence self-employment, resulting in the same profit being taxed twice, once in the first tax year and again in the second tax year of trading.
• The profit which is taxed twice is then noted as ‘overlap relief’. 
• Overlap relief can be carried forward and, in this case, reduce your net profit, for tax purposes, when looking at your 2022/23 tax year position.
• The overlap relief is likely to be quite small as profits in the early years of self-employment are usually low.
Here is an example of the potential impact:
• Mary has been self-employed for many years and draws up accounts to 30th April
• Her profits for the account’s year ended 30th April 2022 are £55,000

• Her profits for the account’s year ended 30th April 2023 are £66,000

• Mary’s overlap relief brought forward is £20,000.

• Mary is single and has no other income.

• The profits for the 2022/23 tax year are as follows;
  • Accounts year ended 30th April 2022 £55,000 plus
  • Transitional element – 1st May 2022 to 5 April 2023 – £66,000 x 11/12 = £60,500 less
  • Overlap relief (£20,000)
  • Total profits for 2022/23 is £95,500
  • Those profits, which under current rules would not normally be taxed in 2022/23 - (£95,500 - £55,000) = £40,500
  • Under the transitional rules, it is proposed that the excess profit of £40,500 is spread equally over 5 tax years, starting with the 2022/23 tax year - £40,500/5 years = £8,100. 
  • The minimum taxable profit in 2022/23 is £55,000 + £8,100 = £63,100
• Assuming tax and national insurance rates stay as they are, Mary’s 2022/23 tax and national insurance bill moves from £13,190 under the present rules to £16,592 under the proposed new rules. Nearly a 26% increase!!
Added By: Sharon Worger on 26th Aug 2021 - 14:12
Number of Views: 37
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