Basis period reform changed how sole traders and partnerships are taxed. From the 2024/25 tax year, profits are taxed for the tax year running to 5 April, whatever date your accounts are drawn to. The 2023/24 tax year was the transition year, when any overlap relief was used up and any extra profit brought into charge can be spread over five years to 2027/28. Businesses already reporting to 31 March or 5 April are largely unaffected.
For decades, self employed people and partners were taxed on a “current year basis”, meaning the profits taxed in a year were usually those of the accounting period ending within it. That created a mismatch for anyone whose accounting date fell outside the end of the tax year, and it produced quirks such as overlap profits and overlap relief. Reform swept that away and aligned everyone to the tax year itself. If you want the wider picture on how the self employed are taxed, our accountancy and tax guide is a good starting point.
What is basis period reform?
Basis period reform is the move from the current year basis to the tax year basis for income tax. Under the new rules, a business is taxed on the profit that arises in the tax year, which runs from 6 April to the following 5 April. HMRC describes the change plainly: the rules that previously required apportionment of profits to basis periods now require apportionment of profits to tax years. The reform applies to sole traders and partners in trading partnerships. It does not change how limited companies are taxed, so if you are weighing up your structure our guide on sole trader versus limited company may help.
When did the change take effect?
The reform took effect for the 2024/25 tax year, with 2023/24 as the transition year. From 2024/25 onwards, your taxable profit is simply the profit for the tax year to 5 April, regardless of your accounting date. The transition year was a one off bridge between the two systems, and it is where most of the unusual figures were created.
Who is most affected by the reform?
HMRC has confirmed the measure only affects businesses that draw up annual accounts to a date different from 31 March or 5 April, which it describes as mainly seasonal businesses and larger partnerships. If your accounting date is already 31 March or 5 April, your basis period and the tax year effectively coincide, so you saw little practical change. If your year end is, say, 30 April or 30 September, you were firmly in scope and your 2023/24 return will have carried figures well beyond a normal twelve months of trading.
Can I keep my existing accounting date?
Yes. You are not forced to change your accounting date to 5 April. You may keep whatever date suits your business and its seasonality. What changes is the arithmetic on your tax return, because you must now apportion your accounting results across the relevant tax years rather than simply reporting the accounts that end in the year. Many businesses have found it simpler to move their accounting date to 31 March or 5 April to remove the ongoing apportionment, but that is a choice, not a requirement.
What happened to overlap relief?
Overlap relief built up when profits were taxed twice in the early years of a business under the old rules, and it was normally only released when you ceased trading or changed your accounting date. Under the reform, any overlap profits brought forward or generated were relieved in full in 2023/24 and were not carried forward into the tax year basis. In other words, the transition year was your opportunity to use that relief, reducing the transition profit that came into charge.
How does the transition profit spreading work?
Because businesses with a non aligned year end effectively reported more than twelve months of profit in 2023/24, the transition could have produced a large one off tax bill. To soften that, the government legislated to automatically spread the transitional additional profit, the portion above your standard part, over five tax years from 2023/24 to 2027/28. The spreading is the default, so a fifth of the transition profit is added to each of those years unless you elect to accelerate it. The transition profit is also treated separately, which can help protect entitlements linked to income levels.
How does this affect payments on account?
The extra profit brought into charge can push up your tax liability and, in turn, your self assessment payments on account. It is worth checking these figures carefully, because a transition year distortion can leave your payments on account higher than your ongoing trade really warrants.
How does this interact with other tax changes?
Basis period reform sits alongside two other shifts worth understanding. The cash basis is now the default method for many small unincorporated businesses, so our guide on cash basis versus accruals accounting explains which suits you. The reform also paves the way for Making Tax Digital for income tax, since taxing to the tax year makes quarterly digital reporting far more workable.
Why does the transition create risk of an enquiry?
The transition year forced unusual numbers onto returns: more than a year of profit, overlap relief being released, and a transition figure split out and spread. Those are exactly the sorts of one off entries that can attract questions, especially where overlap relief has been claimed or apportionment has been done by hand. HMRC has the information to check whether the figures add up, and enquiries can be time consuming and expensive to answer even when nothing is wrong.
If HMRC opens an enquiry into your transition year figures, your accountant’s time in defending your return can run into thousands of pounds. A tax investigation insurance policy from Solar Protect covers up to £100,000 of your own accountant’s fees with no excess to pay, so you can respond properly without worrying about the cost. You can get a quote in minutes.
Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.