Stopping self employment: tax steps

Q: What does a final year look like in numbers?

Illustration only. Priya, a sole trader with a 31 March year end, stops on 30 September 2026. Her accounts for the six months show a profit of £14,000 before capital allowances. Her main pool stands at £3,000. She sells her equipment for £1,500 and keeps a laptop worth £500. Disposal values: £1,500 plus £500 market value = £2,000. Pool of £3,000 less £2,000 leaves a balancing allowance of £1,000; no writing down allowance and no annual investment allowance in the final period. She keeps stock that cost £800 but would sell for £1,200 in the open market; £1,200 is brought in as closing stock instead of £800, adding £400 to profit. Taxable profit for 2026 to 2027: £14,000 less £1,000 plus £400 = £13,400, all reported on her 2026 to 2027 return. Her Class 4 is 6% of £830 (the amount above £12,570). If she had transition profit still being spread, the remaining balance would be added to this year.

Q: What else needs closing down?

VAT. GOV.UK says you must cancel your registration within 30 days of no longer being eligible, send a final return, and account for VAT on stock and assets you still hold if you reclaimed VAT on them and the total VAT due is over £1,000. Payroll. Close the PAYE scheme and send final payroll reports if you employed staff. Construction Industry Scheme. Registered contractors and subcontractors must call the CIS helpline as soon as possible. Payments on account. The next payments on account are based on the previous year's bill; if the final year's profit is lower, consider reducing them. See our guide to payments on account.

When a sole trader stops trading, the final tax year taxes the profits from 6 April to the date the trade ceased, plus any balancing charges on equipment and the value of any stock kept or sold. Capital allowance pools close with a balancing allowance or charge, unsold stock is brought in at market value, and a loss in the last 12 months can be carried back three years. Class 4 National Insurance is due on the final profits in the normal way, and HMRC must be told the business has stopped.

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When has the trade actually stopped?

For tax purposes a trade permanently ceases on the date the business “closes its doors” in circumstances that turn out to be permanent. HMRC’s Business Income Manual at BIM80565 applies Marriott v Lane: the date holds even if the owner hoped to restart at the time. A decision to wind down or sell is not a cessation on its own if trading actually carries on afterwards (J & R O’Kane & Co v CIR). Collecting outstanding debts after the last sale does not keep the trade alive either (BIM80575), so those collections fall under the separate rules in our guide to post cessation receipts and expenses.

Record the date carefully: it fixes the final tax year, the final capital allowance period and the 12 months used for terminal loss relief. You tell HMRC through the online “stop being self employed” service, and you still send a final Self Assessment return for the year of cessation. If you are stopping only because your trading income will be £1,000 or less, GOV.UK says to tell HMRC after the end of the last tax year in which you were self employed; see our page on the trading allowance.

Which profits are taxed in the final year?

Since basis period reform, section 7 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) charges tax on the profits of the tax year itself. In the year the trade stops, that means the profits from 6 April to the date of cessation, apportioned from the accounts if your accounting date is not 31 March or 5 April. The old overlap relief system has gone: HMRC’s basis period guidance says the final year to claim overlap relief was the 2023 to 2024 return.

One transitional point still bites in 2026 to 2027. Businesses that changed to the tax year basis were allowed to spread their transition profit over several years. HMRC’s transition profit guidance says that if the business ceases on or before 5 April 2027, any transition profit not yet taxed must be taxed in the year the business ceased. A trader who stops during 2026 to 2027 with spread amounts outstanding will see them all arrive in the final return. Our basis period reform guide explains how the spreading worked.

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What happens to equipment and capital allowances?

The Capital Allowances Act 2001 (CAA 2001) treats the chargeable period in which the qualifying activity permanently ceases as the final chargeable period for the main pool and special rate pool (section 65). Three rules follow:

No writing down allowance. Section 55(4) gives a balancing allowance instead of a writing down allowance in the final period. If the disposal values exceed the pool balance, there is a balancing charge that is added to the final profits.
No annual investment allowance. Section 38B, general exclusion 1, excludes expenditure incurred in the chargeable period in which the activity is permanently discontinued.
Every asset needs a disposal value. Section 61 lists permanent discontinuance as a disposal event. Assets sold are brought in at the net sale proceeds. Assets you keep, for example a van you now use privately, fall under the catch all item in the section 61 table and are brought in at market value. The disposal value is normally capped at the original qualifying cost (CA23250).

GOV.UK’s own checklist for stopping self employment tells you to calculate capital allowances “including any balancing charges if you’ve sold business equipment or machinery”. Gains on assets such as goodwill or business property fall under Capital Gains Tax, where Business Asset Disposal Relief may apply.

How is stock valued when you stop?

Closing stock is not left at cost. ITTOIA 2005 section 175 decides the value:

What happens to the stock	Value brought into the final profits	Rule
Sold to an unconnected UK trader who can deduct the cost	The price actually received	Section 176
Sold to a connected UK trader	Arm’s length value, unless an election is made	Section 177
Sold to a connected trader with a joint election	The higher of original cost and the price received	Section 178
Kept, given away or sold to someone who is not trading	Open market value at cessation	Section 175(4)

The section 178 election is only available where the arm’s length value exceeds both cost and the price received, and both parties must make it by the first anniversary of the normal Self Assessment filing date for the year of cessation. HMRC reads “open market value” as the price the stock would fetch in bulk under practical business conditions, not a fire sale (BIM33525). There is an exception on death: a sole trader’s closing stock is valued at the lower of cost and net realisable value (BIM33520). Our page on stock valuation covers how stock is measured while the trade continues.

What if the last months of trading make a loss?

Section 89 of the Income Tax Act 2007 gives terminal loss relief. A loss made in the final 12 months of trading can be set against profits of the same trade in the final tax year and the three previous tax years, starting with the latest. HMRC’s helpsheet HS227 explains how to split the final 12 months across two tax years where the accounts do not line up, treating a profit in either part as a nil loss. For a trade that ceased in 2025 to 2026, HS227 gives a claim deadline of 5 April 2030.

Terminal loss relief only reaches profits of the same trade. A loss can also be set against general income of the year of loss or the previous year, but that sideways relief is subject to the commercial basis test and to the cap on income tax reliefs, which HS227 gives as the higher of £50,000 and 25% of adjusted total income.

What National Insurance is due in the final year?

Class 4 contributions are charged on the final year’s profits in the usual way. For 2026 to 2027 GOV.UK gives the rates as 6% on profits between £12,570 and £50,270 and 2% above that.

Class 2 is no longer a compulsory payment. For 2026 to 2027, if profits are £7,105 or more Class 2 is treated as paid to protect your record; if they are lower you can choose to pay voluntary Class 2 at £3.65 a week. Someone stopping early in the tax year with small final profits should check whether a voluntary payment is worthwhile for their State Pension record. Income that arrives after the trade has ended is not liable to Class 4 at all (BIM90010). More detail is on our page about self employed National Insurance.

What does a final year look like in numbers?

Illustration only. Priya, a sole trader with a 31 March year end, stops on 30 September 2026. Her accounts for the six months show a profit of £14,000 before capital allowances. Her main pool stands at £3,000. She sells her equipment for £1,500 and keeps a laptop worth £500.

Disposal values: £1,500 plus £500 market value = £2,000.
Pool of £3,000 less £2,000 leaves a balancing allowance of £1,000; no writing down allowance and no annual investment allowance in the final period.
She keeps stock that cost £800 but would sell for £1,200 in the open market; £1,200 is brought in as closing stock instead of £800, adding £400 to profit.
Taxable profit for 2026 to 2027: £14,000 less £1,000 plus £400 = £13,400, all reported on her 2026 to 2027 return.

Her Class 4 is 6% of £830 (the amount above £12,570). If she had transition profit still being spread, the remaining balance would be added to this year.

What else needs closing down?

VAT. GOV.UK says you must cancel your registration within 30 days of no longer being eligible, send a final return, and account for VAT on stock and assets you still hold if you reclaimed VAT on them and the total VAT due is over £1,000.
Payroll. Close the PAYE scheme and send final payroll reports if you employed staff.
Construction Industry Scheme. Registered contractors and subcontractors must call the CIS helpline as soon as possible.
Payments on account. The next payments on account are based on the previous year’s bill; if the final year’s profit is lower, consider reducing them. See our guide to payments on account.

What are the common mistakes?

Leaving the capital allowance pool open and claiming a writing down allowance in the final year, instead of computing a balancing adjustment.
Claiming the annual investment allowance on equipment bought in the last period.
Ignoring stock and equipment taken home, which must be brought in at market value.
Forgetting that unspread transition profit is accelerated into a 2026 to 2027 cessation.
Missing the terminal loss claim because the loss straddles two tax years.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.