Glossary · UK
What is Overlap Relief?
Relief for profits that were taxed twice under the old current year basis rules for sole traders and partnerships with a non-April accounting year-end, usable on a change of accounting date or on cessation of trade.
Full Definition
Overlap relief compensates sole traders and partners for profits that were taxed twice under the pre-2024/25 current year basis of assessment, which arose whenever a business had an accounting year-end other than 31 March or 5 April. Under the old rules, a new business's opening years could see the same period of profit fall into two different tax years' basis periods -- for example, a business starting on 1 July with a 30 June year-end would see profits for its first nine months taxed in the year of commencement, and then part of that same period taxed again as part of the first full 12-month basis period the following year -- creating "overlap profits" that had effectively been taxed twice. This double-taxed amount was carried forward indefinitely as overlap relief, to be deducted either when the business changed its accounting date to align more closely with the tax year (accelerating the recognition of a full or partial extra period of profit, against which the overlap relief could be set), or, most commonly, when the business permanently ceased trading, at which point any remaining overlap relief was deducted from the final period's profits in full. Many businesses that never changed their accounting date or ceased trading carried unused overlap relief for years or even decades without realising its value, since it only crystallised as a deduction at those two trigger points. The 2024/25 basis period reform brought a one-off resolution: all self-employed businesses and partnerships still using a non-April accounting date were moved onto the tax year basis in the 2023/24 transition year, and any overlap relief still held at that point was automatically deducted against the transition year's profits, finally releasing the value of decades-old overlap relief for many long-established businesses. Because HMRC did not hold historic overlap relief figures centrally for older businesses, many taxpayers needed to dig out old tax returns or use HMRC's overlap relief calculation request service to establish the correct figure before the transition year deduction could be claimed, and any overlap relief not identified and used in the transition year is permanently lost, since there is no longer a current year basis mechanism under which it could ever crystallise again.