Self-Employed Basis Period Reform: What Changed in 2024/25 and Beyond

For decades, self-employed sole traders and business partners were taxed on profits of their accounting year that ended in the tax year -- a system known as the "current year basis." From 6 April 2024, that changed entirely. The basis period reform, which the government announced in 2021 and implemented in stages, moved all self-employed individuals onto a tax-year basis. If you have a non-standard accounting year end, the ongoing implications are significant.

The Old System: Current Year Basis

Under the old rules, if your accounting year ended on, say, 31 December, the profits for the year ending 31 December 2023 would be taxed in 2023/24 (the tax year in which that accounting year ended). Your filing deadline and tax bill related to a period that could be up to eleven months out of step with the 5 April tax year.

This created complexity for opening and closing years (where overlap profits arose and were carried forward for relief only when a business ceased or changed its accounting date) and made it difficult for HMRC to align tax collection with when income was actually earned.

The New System: Tax Year Basis

From 2024/25 onwards, self-employed individuals are assessed on profits arising in the tax year itself: 6 April to 5 April. If your accounting year matches the tax year (for example, you have a 31 March or 5 April year end), nothing changed in practice. Your accounts already aligned with the tax year.

If your accounting year ends on a different date -- 31 December, 30 June, 31 October -- you now have a mismatch. Your accounts cover twelve months, but those twelve months do not align perfectly with 6 April to 5 April.

Dealing with a Non-April Year End

HMRC offers two approaches for traders whose accounting year does not end between 31 March and 5 April:

Option 1: Change your accounting year end. Moving to a 31 March or 5 April year end eliminates the mismatch entirely. This involves preparing a short-period set of accounts for the transitional period. There are practical implications -- VAT quarters, payroll cycles, statutory accounts -- but for many small businesses it is the cleanest long-term solution.

Option 2: Apportion profits. If you keep your existing year end, HMRC allows you to apportion the profits of two consecutive accounting periods to arrive at a tax-year figure. For example, a 31 December year end means:

• 2026/27 tax year = 6 April 2026 to 5 April 2027
• Profits assessed = 9/12 of profits for the year ending 31 December 2026 + 3/12 of profits for the year ending 31 December 2027

This apportionment must be done on a monthly basis. If your profits fluctuate significantly between years, the timing of when income and costs fall within your accounts will directly affect your tax bill.

The Transitional Year: 2023/24

The 2023/24 tax year was a transitional year, and it was -- for many -- very complex. Traders with non-April year ends had to:

1. Report their normal basis period profits (the accounting year ending in 2023/24 under the old rules)
2. Add "transition period profits" -- the additional months from the end of that basis period up to 5 April 2024, to bridge the gap to the new tax-year basis

Transition profits were added to 2023/24 assessable profits but could be spread over five tax years (2023/24 to 2027/28) to smooth the tax impact. Overlap relief accumulated from the old opening-year rules was also given at this point -- used to reduce the transition profit figure.

If you have transition profits being spread and you have not yet used all five years of spreading, the remaining amounts will be assessed in 2024/25, 2025/26, 2026/27, and 2027/28. These are additional amounts added to your current trading profit each year. They are included in your Self Assessment return automatically if you set up the spreading election correctly in 2023/24.

Ongoing Impact for 2026/27

For 2026/27, most traders with April year ends simply report their 2026/27 profits as normal. Those with non-April year ends report apportioned profits and any remaining spread transition profits.

The reform also matters for:

• MTD ITSA. Making Tax Digital for Income Tax Self Assessment is mandatory from April 2026 for self-employed individuals and landlords with income over GBP 50,000. From April 2027 the threshold drops to GBP 30,000, and from April 2028 to GBP 20,000. MTD ITSA requires quarterly submissions of income and expenditure data via compatible software. The tax-year basis aligns with this quarterly reporting structure, which is part of why HMRC introduced the reform.

• Cash flow planning. Under the old system, a 31 December year end trader had only nine months between their accounting year end and their January tax payment. Under the new system with apportionment, the effective lag varies and requires careful cash flow modelling each year.

• Partners in partnerships. The same rules apply to individual partners' share of partnership profits. Partnerships must also align their reporting to the tax-year basis, though they can maintain a non-April accounting date at the partnership level.

Practical Steps to Take Now

If you have a non-April year end, review whether changing your accounting date makes sense. Speak with your accountant about whether any transition profit spreading elections were made correctly in 2023/24 and what additional assessable amounts arise through to 2027/28. Ensure your bookkeeping software can produce apportioned figures for the tax year if needed.

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Use the CalcHub self-employed tax calculator to estimate your 2026/27 tax liability, including any transitional profits still being spread from 2023/24.