What is the basis period reform and how does it affect self-employed people in the UK?

Full answer

For decades, self-employed sole traders and partnerships were taxed on profits from their accounting year ending within the tax year -- known as the "current year basis." This created opening-year and closing-year overlap rules, overlap relief, and significant complexity. HMRC reformed the system to align taxable profits with the actual tax year. The old system Under the previous rules, if your accounting year ended 30 April, your 2022/23 tax was based on profits for the year to 30 April 2022 -- profits earned from May 2021 to April 2022 but taxed in the year ending 5 April 2023. Early trading years created "overlap profits" that were taxed twice and could only be relieved on cessation or a change of accounting date. The transition year: 2023/24 2023/24 was a mandatory transitional year. All self-employed taxpayers were moved to the tax-year basis. This meant taxing profits from the end of the previous basis period to 5 April 2024. The resulting "transition profits" (the extra months of income caught in the jump) could be spread across five years (2023/24 to 2027/28) after deducting any accumulated overlap relief. Taxpayers were able to accelerate this if they preferred. From 2024/25 onwards: tax-year basis From 2024/25 (and including 2026/27), profits are taxed on what was earned in the actual tax year -- 6 April to 5 April. If your accounting year matches the tax year, nothing changes in practice. If your accounts run to a different date (e.g., 31 December), you must apportion profits from two accounting periods to arrive at a 6 April to 5 April figure. You can use actual profit splits or time-apportionment estimates where exact figures are not available. Changing your accounting date Many self-employed people and partnerships found it simpler to shift their accounting year-end to 31 March or 5 April to eliminate the apportionment workload. HMRC treats 31 March as equivalent to 5 April for this purpose. Impact in practice -- No more overlap relief to track -- it should have been used in the transition year. -- Simpler planning: your tax bill more closely matches the year your income was earned. -- Cash-flow change: if your accounts previously ended early in the tax year, you may be paying tax on income earlier than before. -- MTD ITSA quarterly submissions from April 2026 (for income over GBP 50,000) align naturally with the tax-year basis. If you are still spreading transition-year profits, the final instalment falls in your 2027/28 return, due 31 January 2029.

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