Basis Period Reform: What the Move to the Tax-Year Basis Means for Sole Traders and Partners
Basis period reform has replaced the old current-year basis with a tax-year basis for the self-employed and partners, so profits are now taxed as they arise from 6 April to 5 April. This explainer sets out the 2023/24 transition year, how transition profit is spread over up to five years, the role of overlap relief, and why the change dovetails with Making Tax Digital for Income Tax. Companies are unaffected.
The change in one sentence: from accounting-date basis to tax-year basis
Basis period reform changes the period of profit that a self-employed individual or partner is taxed on. Under the old current-year basis, you were taxed for a tax year on the profit of the 12-month accounting period that ended within that tax year. A business drawing accounts to 30 June 2022, for example, was assessed in 2022/23 on its year ended 30 June 2022, so there was always a lag between the accounts and the tax year. From 2024/25 onwards the tax-year basis applies instead: you are taxed on the profit that actually arises in the tax year itself, running from 6 April to 5 April, whatever your accounting date happens to be. Where your accounts do not end on 5 April, that means apportioning profit across two consecutive sets of accounts to build the figure for the tax year. The aim is to align taxable profit with the tax year so that everyone is taxed on the same period, which HMRC regards as simpler and a necessary foundation for digital reporting.
Who is affected, and who is not
The reform applies to individuals carrying on a trade, profession or vocation as a sole trader, and to individual members of trading partnerships, including limited liability partnerships taxed as partnerships. Companies are entirely outside the reform: corporation tax continues to be charged by reference to the company's own accounting period, so an incorporated business notices nothing here. Landlords are, in most cases, not directly affected either, because rental profit is already calculated on a tax-year basis rather than an accounting-date basis. The reform still matters to a landlord who also runs an unincorporated trade, and to any partner in a property or trading partnership. In practice the businesses that feel the change most are those whose accounting date sits well away from the end of the tax year, such as 30 April or 30 June, because their profit now has to be re-cut to fit 6 April to 5 April.
The 2023/24 transition year and how it is built
2023/24 was the transition year that bridged the two systems, and for affected businesses it could tax more than 12 months of profit. The basis period for 2023/24 was made up of two parts. The standard part was the 12-month period beginning immediately after the end of your 2022/23 basis period, in effect your normal set of accounts. The transition part then ran from the end of that standard part up to 5 April 2024, capturing the extra months needed to catch the business up to the tax year. HMRC treats an accounting date falling between 31 March and 4 April as equivalent to 5 April, so a 31 March year-end business had no meaningful transition part. Profit is usually apportioned to the transition part on a days basis. The profit falling in that transition part, once reduced by overlap relief, is the transition profit, and it is this figure that qualifies for spreading rather than being taxed all at once.
Overlap relief: using it up in the transition
Overlap relief exists because, under the old rules, businesses starting after 5 April or using a non-tax-year accounting date were often taxed twice on the same slice of early profit. That doubly taxed amount was carried forward as overlap relief, historically only relievable when the business ceased or changed its accounting date. Basis period reform brought all of that to a head. Any unused overlap relief had to be deducted in calculating the 2023/24 transition profit, and it cannot be used after the 2023/24 tax year. For a long-established business the overlap figure often reflected profit levels from many years earlier and could be much smaller than the transition profit it was set against, leaving a net charge. Where overlap relief exceeded the transition-part profit, it could reduce other profits of the year. Retrieving the correct overlap figure, sometimes from older records or a request to HMRC, was one of the most important compliance steps of the whole exercise.
Spreading transition profit over up to five years
To soften the cash-flow effect of being taxed on more than 12 months of profit, the transition profit remaining after overlap relief is spread across five tax years, from 2023/24 through to 2027/28. At least 20% must be brought into charge in 2023/24, with the balance then taxed equally over the following four years, so roughly a further 20% in each of 2024/25, 2025/26, 2026/27 and 2027/28. As an illustrative example, a sole trader with £50,000 of transition profit after overlap relief would ordinarily bring £10,000 into charge in each of the five years. The spreading is automatic, but you can elect to accelerate more than the minimum into an earlier year, which can make sense if you have spare basic-rate band, unused allowances, or expect to move into a higher band later. Transition profit is also treated separately from ordinary trading profit for some purposes, which can help protect certain allowances and thresholds. Because we are now in 2026/27, businesses are into the fourth slice of any spread, so it should already be a known, recurring figure in each year's return rather than a surprise.
Why many businesses are moving their year-end to 31 March or 5 April
Under the tax-year basis, keeping an accounting date away from the end of the tax year creates permanent extra work rather than a one-off transition cost. If your accounts still end on, say, 30 June, then every tax year's profit must be assembled from two accounting periods and apportioned across the 5 April boundary, often before the later set of accounts is even finalised. That can force the use of provisional figures and a later amendment once the real numbers are in. For this reason many sole traders and partnerships have aligned their accounting date to 31 March or 5 April, so that a single set of accounts maps cleanly onto the tax year with no apportionment. HMRC accepts a 31 March to 4 April date as equivalent to 5 April, which is why 31 March, being a clean month-end, is the popular choice. Changing your year-end is not compulsory, and there are cases where an existing date should be kept, but for most unincorporated businesses alignment removes an annual estimation problem.
How this dovetails with Making Tax Digital for Income Tax
Basis period reform was designed to clear the ground for Making Tax Digital for Income Tax, which requires digital record-keeping and quarterly updates to HMRC. Quarterly reporting only works sensibly if everyone is measuring profit over the same period, so putting all unincorporated businesses on the tax-year basis first was a logical precondition. Making Tax Digital for Income Tax begins on 6 April 2026 for sole traders and landlords with qualifying income over £50,000, extends to those over £30,000 from 6 April 2027, and reaches those over £20,000 from 6 April 2028. Now that the tax-year basis is in force, the quarterly updates align naturally to the tax year, and an accounting date already set to 31 March or 5 April keeps digital submissions straightforward. The two reforms are best treated as a single change of approach: taxed on the tax year, reported digitally through the tax year.
Short FAQ
Does basis period reform affect limited companies? No. The reform applies only to the self-employed and to individual partners. Companies remain taxed on their own accounting period under corporation tax and are unaffected. Can I still use overlap relief? Only up to and including the 2023/24 transition year. Any unused overlap relief had to be deducted in that year and cannot be carried forward or used afterwards, so if you did not claim it then, it is important to check whether your return needs correcting. Do I still have to spread my transition profit, or can I pay it sooner? Spreading over the five years to 2027/28 is the default, with a minimum of 20% in 2023/24, but you can elect to bring more into charge earlier where it is beneficial, for example to use spare basic-rate band. Each business should model its own position rather than assume the default is optimal.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.