Transition profit is the extra profit, beyond a normal 12 months, that businesses with a year end before 31 March were taxed on in 2023 to 2024, less any overlap relief. Unless you elect otherwise, 20% of it is taxed in each of the four tax years from 2023 to 2024 and the balance in 2027 to 2028. Each slice is added to that year’s trading profit, but the tax on it is worked out in a special way so that it does not distort your net income.

Where did transition profit come from?

For 2023 to 2024 only, Finance Act 2022, Schedule 1, Part 6 stretched the basis period of every continuing trade so that it ran from the end of the 2022 to 2023 basis period to 5 April 2024. That basis period has two components:

  • The standard part: the first 12 months, normally the accounting year ending in 2023 to 2024 (paragraph 65(2)).
  • The transition part: the rest of the period, running to 5 April 2024, or to the accounting date if that was 31 March to 4 April 2024 (paragraph 65(3) and (4)).

Paragraph 70 then sets out six steps. The profit of the transition part is reduced by overlap relief, and the “transition profit” is the lower of that figure and the combined profit of both parts. If either figure is nil or a loss, there is nothing to spread. HMRC works through the steps, with examples, at BIM81290. If your accounts were already made up to between 31 March and 5 April, HMRC confirms you have no transition profit.

The background to the reform is covered in basis period reform explained and in our page on the tax year basis.

How is the transition profit spread?

Paragraph 72 spreads the transition profit over five tax years. In each of the four tax years beginning with 2023 to 2024, an amount equal to 20% of the transition profit is treated as arising and is chargeable as trading income. In the fifth year, 2027 to 2028, the balance is charged. HMRC’s example at BIM81310 is a trader with transition profit of £30,000: £6,000 is taxed in each year from 2023 to 2024 to 2026 to 2027, and the remaining £6,000 in 2027 to 2028.

Spreading is the default. A trader may instead elect to bring more into charge in a particular year, which reduces what is left for later years. That choice has its own page: choosing to accelerate transition profits. Because of that election, not everyone’s remaining slices are the same size, which is why HMRC asks you to keep a record of the transition profit and how much has already been taxed.

For 2026 to 2027, the current tax year, a trader who has made no election will have the fourth 20% slice added to their profit, with the final slice still to come in 2027 to 2028.

How is the tax on each slice worked out?

Paragraph 75 modifies the income tax calculation in section 23 of the Income Tax Act 2007 for every year in which a slice is charged. HMRC explains the mechanics at BIM81320:

  1. The slice is treated as a separate component of income, “the transition component”.
  2. Reliefs are deducted as normal, but the transition component is then left out of net income, and tax is calculated on everything else (amount A).
  3. A second, notional calculation includes the slice in net income (amount B). Allowances are recalculated on that higher figure.
  4. The difference between B and A is added as tax.

HMRC says the transition profits are excluded from net income to reduce the impact on benefits and allowances. The tax itself is not reduced: because B is calculated with the slice included, any loss of allowances caused by the slice is still charged. In HMRC’s Example 24, a trader with standard profits of £98,000 and a slice of £4,000 pays £2,000 of tax on the slice, an effective 50%, because the slice takes notional net income over £100,000 and reduces the personal allowance. For the current tax year, gov.uk confirms the personal allowance falls by £1 for every £2 of adjusted net income above £100,000. Our guide to adjusted net income explains why that threshold is so expensive.

The slice is not ignored for National Insurance. HMRC’s notes to the self employment (full) pages say transition profits charged as a result of basis period reform are included in taxable profits for National Insurance purposes. For 2026 to 2027, Class 4 is 6% on profits between £12,570 and £50,270 and 2% above that.

Where does the slice go on the tax return?

On the 2025 to 2026 self employment (full) pages, the slice is entered in box 73.3, “Spread of the transition profit treated as arising in this tax year”. It must not be included in the adjusted profit in box 73 or in the box 68 apportionment adjustment. Box 73.4 lets you set trading losses brought forward against the slice, and HMRC’s notes say that once brought forward losses have been used against the transition profit they cannot also be set against adjusted profit.

What happens if the business stops before 2027 to 2028?

Paragraph 72(5) and (6) provide that if the trader permanently ceases to trade before the whole transition profit has been charged, the balance is treated as arising in the tax year of cessation. HMRC’s guidance puts it as a business ceasing on or before 5 April 2027. In HMRC’s Example 20, a trader with £20,000 of transition profit who ceases on 12 February 2026 is taxed on £4,000 in each of 2023 to 2024 and 2024 to 2025, and on the remaining £12,000 in 2025 to 2026.

That bunching can push the final year into a higher band, so anyone planning to retire, incorporate or sell should look at the timing alongside our guide to stopping self employment.

What does spreading look like in practice?

Illustration only. A sole trader with a 30 September year end had transition profit of £15,000 after overlap relief. With no election:

Tax year Transition slice
2023 to 2024 £3,000
2024 to 2025 £3,000
2025 to 2026 £3,000
2026 to 2027 £3,000
2027 to 2028 £3,000 (balance)

If the same trader stopped trading on 31 December 2026, the 2026 to 2027 slice would be the whole remaining £6,000 and nothing would be taxed in 2027 to 2028.

How do the slices affect payments on account and other reliefs?

Payments on account are each 50% of the previous year’s Self Assessment income tax liability, less tax deducted at source (section 59A of the Taxes Management Act 1970). The tax on a slice is part of that liability, so it feeds into the following year’s payments on account. When the last slice is taxed in 2027 to 2028, the 2028 to 2029 payments on account will be based on a year that included it. If your profits are otherwise steady, that is a reason to consider a claim to reduce them; see payments on account.

Two other rules apply. Paragraph 74 says transition profit is ignored when farmers and creative artists work out profits for averaging, which our page on averaging for farmers and creators covers. And any loss created in 2023 to 2024 by deducting overlap relief could be treated as a terminal loss under paragraph 71.

What are the common mistakes?

  • Forgetting the slice. It is not in the accounts, so it is easy to leave off the return. HMRC will expect it every year until the balance is taxed.
  • Recalculating 20% of the wrong figure. After an acceleration election, later slices are based on a reduced transition profit, not the original.
  • Putting the slice in the wrong box. It belongs in box 73.3, not in the adjusted profit.
  • Assuming it is tax free for allowance purposes. It is kept out of net income, but the extra tax from losing allowances is still charged through the notional calculation.
  • Ignoring cessation. Stopping trade before 6 April 2027 brings the whole balance into the final year.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.