Trading income: basis period reform

Basis periods

Basis periods are important for tax years before the 2023/24 tax year.

For tax years before the 2023/24 tax year, a basis period is the time interval for which you are charged tax in a particular tax year. The tax year is a 12-month period which runs from 6 April to the following 5 April. For example, the 2022/23 tax year ran from 6 April 2022 to 5 April 2023.

For a continuing business, the basis period is usually the 12-month accounting period that ends within that tax year. But the rules regarding basis periods are changing from the 2023/24 tax year. These changes will affect you if you do not have an accounting period ending between 31 March and 5 April and are explained under the heading Basis period reform basics below.

Normally, accounts are prepared to the same date in each year (the accounting date), so you usually choose a date that is convenient for you. You can have any day in the year as your accounting date, although from a tax point of view the easiest date to choose is 5 April. Any date from 31 March to 5 April inclusive will be treated as 5 April, to make things as easy for you as possible.

So, if you make up your accounts to 5 April each year, this is your accounting date and the 12 months to 5 April is your accounting period. If you make up your accounts to, say, 31 March each year, this is your accounting date and the 12 months to 31 March is your accounting period.

Basis periods when starting self-employment

First tax year

For the first tax year, your basis period is always the period from the date you started trading until the following 5 April. This will remain the same under the new basis period reform rules (as explained under the heading Basis period reform basics below).

Remember that if your accounting date falls between 31 March and 5 April inclusive, this will be treated as 5 April for these purposes.

Second tax year

The information below explains the position before basis period reform (before the 2023/24 tax year, so up to and including 2022/23).

For the second tax year that you are self-employed you may fall into one of three different categories:

1. If you have prepared a set of accounts for at least 12 months that end in that second tax year, then the basis period for that tax year is the 12 months ending on the accounting date.
2. You may have no accounts that actually end in the tax year: if that is the case, the basis period is from 6 April to the following 5 April.
3. You may prepare a set of accounts that end in the tax year, but they are less than 12 months long. In that case, the basis period is your first 12 months of trading.

The above rules mean that some profits may be taxed twice in different tax years.  The profits that are taxed twice in the opening years of self-employment are called overlap profits. See the heading Overlap profits below for more detailed information on these profits.

Before the 2023/24 tax year, overlap profits would usually be deducted from other trading profits when you cease trading in the future, or if you change your accounting period. This is known as overlap relief and we explain more about this in the section Using overlap profits below, and show how it works in the example of Susan under the heading Changing accounting date before the 2023/24 tax year below.

The rules for using overlap relief are changing from the 2023/24 tax year, as explained under the heading Basis period reform basics below.

Basis period in last year of trading

If your trade ceases before 6 April 2023, then the final basis period starts immediately after the previous period ends and stops on your final day of trading.

Overlap profits

The tax system operates so that, overall, all business profits are only taxed once. However, as you can see from the example under the above heading Basis periods when starting self-employment, sometimes when a business first starts its profits are taxed more than once. These profits that are taxed twice are called overlap profits.

Before the new basis period reform rules (which start from the 2023/24 tax year) overlap profits could also arise when changing your accounting date (as explained under the heading Changing accounting date before the 2023/24 tax year below).

If you have not used your overlap profits before the 2023/24 tax year, then you must use them in the 2023/24 tax year or lose the available overlap relief, because of the changes under basis period reform.

Using overlap profits

Before the 2023/24 tax year, you can usually use overlap profits, as explained under the heading Overlap profits above, either when you cease to trade or if you change your accounting date to a date closer to the end of the tax year (5 April). Using overlap profits to reduce business profits is called overlap relief. We explain how overlap relief works in the example of Susan under the heading Changing accounting date before the 2023/24 tax year, below.

However, as the rules regarding basis periods are changing from the 2023/24 tax year you will be able to use your overlap profits during the 2023/24 tax year. If you do not use overlap relief in the 2023/24 tax year, then you will lose it – see our further guidance under the heading Overlap relief below for more information.

You should be keeping a note of the amount of any overlap profits you have had. You carry your overlap profits forward on your tax return (for paper tax returns use the self-employment full pages (SA103F)) until you are able to use it (which must be in the 2023/24 tax year at the latest, otherwise you will lose it).

Changing accounting date before the 2023/24 tax year

For the 2022/23 tax year and earlier, it is possible to change your accounting date for tax purposes before the introduction of basis period reform, but certain conditions have to be met. This means that if you decide to change your accounting period, for example within the 2022/23 tax year, you will have to meet all of the following conditions:

• You notify HMRC of a change in accounting period on your tax return which is filed on time (the information should be included on box 11 (and in box 12 if applicable) on the self-employment full supplementary pages SA103F).
• The new accounting period date is not longer than 18 months.
• There has not been a change in the accounting period in the last five previous tax years or there is a commercial reason for changing the accounting period which is notified on the tax return.

If your explanation is reasonable, it is likely to be accepted. For example, you may have two businesses and you want the same accounting date for each.

If any of these conditions are not met, then the change of accounting period will not be recognised by HMRC. There is additional guidance on changing your accounting period in the 2022/233 tax year on helpsheet HS222 on GOV.UK.

You cannot just keep changing the date each year because it is convenient to do so.

If you want the change to be temporary – you can ignore it for tax purposes. Otherwise, you will be treated as having changed your accounting date if any of the circumstances described below apply:

• You have made up accounts to a date different from that used for your tax in the previous year.
• You intend to draw up a set of accounts for more than 12 months, meaning that no accounting date falls into the current tax year.
• If you changed your accounting date last year but this was not accepted by HMRC, and you are using the same date again.

Before the 2023/24 tax yearonwards, changing your accounting date meant that you would have a new basis period for your taxable profits using the following rules:

1. If your new accounting date in 2022/23 is more than 12 months after the end of your basis period for the previous year (2021/22), your new basis period will be from the end of that basis period to your new accounting date.
2. If you have changed accounting date and your basis period is more than 12 months, you can use your overlap profits to reduce the basis period to 12 months – see the example of Susan below.
3. If your accounting date in 2022/23 is less than 12 months after the end of your basis period for the previous year to 2021/22, your new basis period will be 12 months ending on the new accounting date – see the example of Tom below.

If you wish to find more information on changing your accounting date, see the guidance contained in the HS222: How to calculate your taxable profits factsheet.

The 2023/24 tax year is a transitional year for the new basis period reform rules. We explain under the heading Accounting date between 6 April and 30 March why you may want to change your accounting period during the 2023/24 tax year to end on a date such as 31 March or 5 April 2024.

Businesses affected by basis period reform

Basis period reform mainly affects the self-employed (sole traders) and partnerships which do not use an accounting period end date between 31 March and 5 April.

This means any unincorporated business which does not have an accounting period ending on 31 March, 1 April, 2 April, 3 April, 4 April or 5 April will have to make changes to the way they calculate their business profits for their tax returns from the 2023/24 tax year onwards.

Also, if you have an accounting period ending between 31 March and 5 April (including 31 March and 5 April) then you may be affected in the 2023/24 tax year if you have unused overlap relief, as explained under the heading Overlap relief below.

  Companies are not affected by basis period reform.

The below summarises how the self-employed and partnerships are affected, depending on your accounting date:

Accounting date of 5 April

You will not be affected by basis period reform unless you have unused overlap relief, as explained under the heading Overlap relief below.

Accounting date between 31 March and 4 April

Accounting year-end will be treated as 5 April for basis period reform as explained under the heading Accounting date between 31 March and 4 April, below. However, you may be affected by basis period reform if you have unused overlap relief, as explained under the heading Overlap relief below.

Accounting date between 6 April and 30 March

Basis period reform will affect the way you calculate your taxable profits and prepare your tax returns for the 2023/24 tax year onwards – see the guidance below under the heading Accounting date between 6 April and 30 March.

Basis period reform basics

Basis period reform means that all self-employed individuals and partnerships will have to report their business tax information to HMRC on a tax year basis, regardless of their accounting period. A tax year is a 12-month period which runs from 6 April in one year to 5 April in the following year, so the 2024/25 tax year runs from 6 April 2024 to 5 April 2025. This is a change from the rules applying up to and including the 2022/23 tax year, which are explained under the heading Basis periods above.

From 6 April 2024, basis period reform results in business profits being assessed and taxed in the tax year in which they arise. This means the business accounts information included on self assessment or partnership tax returns will need to be for the tax year 6 April to 5 April (but see the heading below Accounting date between 31 March and 4 April).

We explain what a basis period is under the heading Basis periods above.

As not all self-employed individuals or partnerships currently prepare their accounts to 5 April, the 2023/24 tax year (6 April 2023 to 5 April 2024) will be a transition period to the new basis of assessing profits. You can read about transition periods under the heading Calculating taxable profits in the transition period, below. Due to the transition period rules, some taxpayers will report profits on their 2023/24 tax return for more than a 12-month period. Reporting profits for a longer period could result in additional tax to pay over five tax years (2023/24 to 2027/28). The guidance on this page explains how these additional profits will be assessed and how any additional tax will be calculated and spread.

Accounting date between 31 March and 4 April

If you currently have an accounting period which ends on any date between 31 March and 4 April (inclusive), then for basis period reform purposes HMRC will treat your accounting period as effectively ending on 5 April. This is called ‘late accounting date rules’.

This means that you will not need to follow any of the complicated rules under the transition period for basis period reform. You can still prepare your accounts for your usual accounting period. For example, if you have an accounting year-end of 31 March then for the 2024/25 tax year, you should report your business profits earned in the period 1 April 2024 to 31 March 2025. Any business income received and/or expenses incurred within these additional days in the 2024/25 tax year, so from 1 April 2025 to 5 April 2025 will be included in the 2025/26 accounts and tax return instead.

You can’t use the ‘late accounting date rules’ in the tax year you cease trading. Also, if you do not want to use the ‘late accounting date rules’ you can elect not to do so, although this will mean having to apportion your business profits from two different accounting periods to report to HMRC on a tax year basis (as explained under the heading Accounting date between 6 April and 30 March, below).

  If you have any unused overlap relief, then you must use it in the 2023/24 tax year. We explain about overlap relief under the heading Overlap relief, below.

Accounting date between 6 April and 30 March

Remember that any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance, when we refer to a 5 April accounting year-end this includes any year-end from 31 March to 5 April.

If your business doesn’t have an accounting date which ends between 31 March and 5 April, you will still have to report your business accounting information on a tax year basis on your tax return starting from the 2024/25 tax year. Also, you will fall into the transition rules starting in the 2023/24 tax year. You can read about transition periods under the heading Calculating taxable profits in the transition period, below.

Unless you change your accounting period (for more information see the heading Changing accounting date to between 31 March and 5 April, below) this means you will need to:

• be able to get details from two sets of accounts to prepare your tax return on a tax year basis from 2024/25 onwards, and
• pay income tax and self-employment National Insurance contributions based on the profits for the tax year (which will be different to your accounting profits, as shown in the example of Cathy below).

The tax return filing deadlines and payments dates  remain the same as before basis period reform.

This can mean there is less time to prepare and submit a tax return (after the end of the second accounting period) than there was under the pre basis period reform rules, and certainly less time to prepare a tax return when compared to someone with a 5 April accounting year-end.

In circumstances such as those explained in the example of Selena above, it may not be possible to finalise profits for the second accounting period in such a short period of time and so it may be necessary to use estimates. We explain more about this below under the heading Keeping accounting date when it is between 6 April and 30 March.

Alternatively, you may choose to change your accounting period to match the tax year (so have an accounting date of 5 April). For more information on changing your accounting period see under the heading Changing accounting date to between 31 March and 5 April, below.

It may be sensible to seriously consider changing the accounting date to 5 April, as it would mean the accounts information will be able to be completed more easily on the respective tax returns. It would also make reporting for Making Tax Digital for income tax (MTD) simpler for businesses who fall into the new MTD regime.

However, you do not have to change your accounting period to the tax year. For some businesses it may be impractical to have an accounting period ending 5 April and so they will choose not to change their accounting date just because of basis period reform. You can still choose any accounting period which works for you, although any cashflow advantages from having a different accounting year-end (say 30 April) will be lost, as you will need to report your business profits arising on a tax year basis (6 April-5 April) for tax purposes, regardless of the accounting year end date.

Changing accounting date to between 31 March and 5 April

Remember any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance,  when we refer to a 5 April accounting date this includes any date from 31 March to 5 April.

If you do not have an accounting date of 5 April, then it may be simplest to change your accounting period to match the tax year as this will avoid apportioning accounting profits on your tax returns as mentioned under the heading Accounting date between 6 April and 30 March, above.

It is possible to change your accounting period date before the introduction of basis period reform, but certain conditions have to be met. These are explained under the heading Changing accounting date before the 2023/24 tax year, above.

Changing the accounting date in 2022/23 means that if there is additional profit then you will not be able to use the spreading rules, as these are only available when changing your accounting period in the transition period (2023/24). We explain about the spreading rules under the heading Spreading additional profits in the transition period, below. Also, you may end up changing your overlap relief position, as mentioned under the heading Overlap relief, below.

Under basis period reform, it is possible to change your accounting date within the 2023/24 tax year without having to meet the three conditions listed under the heading Changing my accounting date before the 2023/24 tax year above. You will also be able to use the spreading rules explainedbelow under the heading Spreading additional profits in the transition period. However, it does mean that you will have to follow the 2023/24 transition rules, which can be complicated depending on individual circumstances – for more information, see the heading Calculating taxable profits in the transition period below.

Keeping accounting date between 6 April and 30 March

We explain below about the use of estimates and the consequences of using them if your business does not have an accounting date between 31 March and 5 April.

Because some businesses may keep a different accounting year-end, HMRC understand that some self-employed individuals and partnerships may not have sufficient time to finalise the second set of accounts that they need to be able to calculate their taxable profits under the new rules for their tax returns before the tax return filing deadline. In these circumstances, it will be necessary to use estimated (provisional) accounts information to complete the tax returns. These estimates will probably need to be changed when the later set of business accounts are finalised (probably after the 31 January online tax return filing deadline).

It is possible to change your self assessment tax return up to 12-months after the online filing deadline.

So, for the 2024/25 tax year you would need to submit your tax return online by 31 January 2026 (or a paper return by 31 October 2025), and you would then have until 31 January 2027 to amend your tax return to provide accurate information.

So, if you have a 31 December accounting date then for the 2024/25 tax year you will prepare your tax return using:

• profits for the period from 6 April 2024 to 31 December 2024 (using the ‘2024 accounts’ for the 12-months 1 January 2024 - 31 December 2024), and
• profits for the period from 1 January 2025 to 5 April 2025 (using the ‘2025 accounts’ for the 12 months 1 January 2025 - 31 December 2025).

However, there is only one month between the end of the ‘2025 accounts’ (31 December 2025) and the online filing deadline, 31 January 2026. In this scenario, it is highly unlikely that you will have been able to prepare a set of final ‘2025 accounts’ to include accurate figures in the 2024/25 tax return. This means you will have to include accurate information from the ‘2024 accounts’ and estimates (provisional figures) from the ‘2025 accounts’. Later, after 31 January 2026, when you finalise the ‘2025 accounts’ it may be the case that you need to amend your 2024/25 tax return for the revised figures from the final ‘2025 accounts’ if the final figures are different to the estimated ones. You will have until 31 January 2027 to amend your tax return.

When using provisional figures, you should try and use the ‘best estimate’ based on the information you have available when submitting your tax return. The provisional figures should be clearly identified in the tax return and you should tick box 20 on the SA100 tax return confirming that the return contains provisional figures. Also, you may want to include details about the provisional figures in the ‘any other information’ box 19 on page TR7 of your tax return.

Filing an amended return will increase the time that HMRC have to open an enquiry into the tax return.

Any amendments to the tax return will result in a re-calculation of the amount of income tax and class 2 and class 4 National Insurance contributions due. Late payment interest will be charged on any additional tax and class 4 National insurance due as a result of the amendment, from the original due date for payment until the actual payment date.

Starting a new business

Remember any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance when we refer to a 5 April accounting year-end this includes any year-end from 31 March to 5 April.

For tax years before the 2023/24 tax year, there are special rules for what periods the newly self-employed and new partners in partnerships must report their taxable profits for in both the first and second tax year of trading. These rules are explained under the heading Basis periods when starting self-employment above.

If you started to trade during the 2022/23 tax year, then consider using an accounting date between 31 March and 5 April. Although under basis period reform you can still choose to use any accounting period, by choosing a non-5 April accounting year end (as explained under the heading Accounting date between 6 April and 30 March above) then it will make completing your tax returns more complicated. This is because from the 2024/25 tax year you need to report your profits made during the tax year to HMRC, and this will be different to your accounting profits.

  Even if you have recently started trading, you should check that you do not have any overlap relief (as mentioned under the heading Overlap relief, below) to use in the 2023/24 tax year.

If you start trading within the 2023/24 tax year, then for tax reporting purposes you will need to include your business profits from the date your trading commenced to 5 April 2024 on your 2023/24 tax return.

Calculating taxable profits in the transition period

  This will usually only affect existing businesses which do not have a 12-month accounting period which ends between 31 March 2024 to 5 April 2024.

Remember any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance, when we refer to a 5 April accounting year-end this includes any year-end from 31 March to 5 April.

The 2023/24 tax year will be the start of the transition period where all affected businesses will have their taxable profits/losses adjusted to align them to the new tax year basis. This will be the case whether you prepare your accounts using the cash basis or the accruals basis.

Depending on individual circumstances, for some taxpayers this will result in complicated tax calculations when taking into account overlap relief, spreading of additional tax payments and interactions with some reliefs and non-tax areas. We explain more about these under the headings Overlap relief, Spreading additional profits in the transition period and How tax is calculated under basis period reform, below.

Examples of some of these types of calculations can be found in HMRC’s Business Income manual on GOV.UK. However, below is a basic outline of how the 2023/24 taxable profits will be calculated under basis period reform is shown by the following formula:

1. ‘Standard part’ profits, plus
2. ‘Transition part’ profits less overlap relief

  Do not get confused between the ‘transition period’ (which is the 2023/24 tax year) and the ‘transition part’ (explained below).

This calculation is described in more detail as follows:

1. Calculate your ‘standard part’ profits. ‘Standard part’ profits are the taxable profits for the 12-month period which would usually end within the 2023/24 tax year. So if you have a 31 October accounting date, your ‘standard part’ profits are taxable profits for the accounting period 1 November 2022 to 31 October 2023.
2. Calculate your ‘transition part’ profits. ‘Transition part’ profits are the taxable profits for the period from the end of the ‘standard part’ to 5 April 2024. So, using the example above, the ‘transition part’ profits are the taxable profits for the period 1 November 2023 to 5 April 2024. It could also be for the period 1 November 2023 to say 31 March 2024, or to say 4 April 2024 under the ‘late accounting date rules’, as mentioned under the heading Business with an accounting date between 31 March and 4 April, above.
3. Calculate your overlap relief. If you have any overlap profits available, you can use overlap relief to reduce taxable profits in the transition period – see under the heading Overlap relief below for more information.
4. Deduct your overlap relief from your ‘transition part’ profits.
5. Then add the amount from step 4 above to the ‘standard part’ profits.

  The overlap relief is used to reduce any ‘transition part’ profits first.

When calculating an apportionment of profits, strictly this should be done according to the number of days in the particular period. However, an alternative method of apportionment suggested by the taxpayer can be accepted by HMRC as long as the apportionment is reasonable and applied consistently (such as apportionment of profits using months rather than days).

We show how the calculation works in the following example.

Overlap relief

Remember any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance, when we refer to a 5 April accounting year-end this includes any year-end from 31 March to 5 April.

Overlap relief is based on overlap profits, which may arise if you have not always used a 5 April accounting date. Overlap relief also includes any transitional overlap relief from when self assessment was first introduced.

Overlap relief can be used to reduce taxable business profits (and therefore your income tax and self-employment National Insurance contributions).

Our guidance under the heading Overlap profits above explains how overlap profits arises.

Even if your business does not have a 5 April accounting date, you may not have any overlap relief to use in the 2023/24 tax year. This may be because:

• you made losses when first starting to trade so never had any overlap profits, or
• you have already used all of your overlap relief in a previous tax year(s) so there is no overlap relief left.

It is possible that you have a 5 April accounting date and have unused overlap relief, because you have changed your accounting period end in an earlier tax year to 5 April but did not use all your overlap relief at that time.  If so, you will have no ‘transition part’ profits as you already use a 5 April accounting date. This means in the 2023/24 tax year your taxable business profits would be calculated as:

1. the ‘standard part’ profits, less
2. overlap relief.

If you are in a partnership, it is possible that different partners have different amounts of overlap relief available. This could be because partners joined the partnership at different times or have different profit share allocations.

  You must use all your overlap relief in the 2023/24 transition period, as any overlap relief not used in this tax year will be ‘lost’ as you will be unable to use it after 5 April 2024. This is the case even if you now have an accounting period which ends between 31 March and 5 April and you are not affected by the other changes under basis period reform.

Finding out about available overlap relief

If you think you may have overlap relief to use, then it is important to look at your previous tax returns to see if they include the amount of overlap relief available. Overlap profit should have been included on the self-employment full supplementary pages (SA103F) box 70, page SEF4. Any overlap relief used should have been disclosed at box 69 on the self-employment full supplementary pages (SA103F). To calculate the amount of overlap relief left to use in the 2023/24 tax year, you should look at box 70 of the 2022/23 tax return.

It may be the case that you have not kept your tax returns from earlier years, or you may have had overlap profits but not recorded the available overlap relief on your tax return. HMRC will try to help affected businesses confirm their overlap relief position.

The easiest way to request information about your overlap relief position from HMRC is to complete a G-Form on GOV.UK. You will need to sign into your government gateway account to complete the G-Form, and the guidance on GOV.UK lists the information you will need to provide HMRC. HMRC should still try to help you if you have not got all the information asked on the G-Form, but it should speed up the process if you can provide as many details about your business as possible. HMRC are aiming to provide information on your available overlap relief within around 15 days. You can request to have the information sent in a letter or on an email.

Loss in the transition period

When considering your taxable profits in the 2023/24 tax year, if you have made a trading loss in the ‘standard part’ or the ‘transition part’, this affects the transition period calculation (explained above under the heading Calculating taxable profits in the transition period). How it is affected depends on if the loss is in the ‘standard part’ or the ‘transition part’ or if there is an overall loss.

Loss in the ‘standard part’, but profit overall

The overall profit (after deducting the loss and overlap relief) will be spread over five years. We explain spreading under the heading Spreading additional profits in the transition period below.

Example: Joe

This example uses the calculation steps outlined under the heading Calculating taxable profits in the transition period above.

Joe prepares his accounts to 30 June each year. For the accounting period ended 30 June 2023 he makes a loss of £8,000 and for the ‘transition part’ (1 July 2023 – 5 April 2024) he makes a profit of £15,000. Joe also has unused overlap relief of £500.

He uses the steps as follows:

1. Calculate the ‘standard part’ losses. For Joe, his ‘standard part’ losses are the losses made in the 12-month period which would usually end within the 2023/24 tax year. These are his losses for the accounting year ended 30 June 2023, £8,000.
2. Calculate the ‘transition part’ profits. For Joe the 'transition part’ profits are the taxable profits for the period from the end of the ‘standard part’ to 5 April 2024. So, from 1 July 2023 to 5 April 2024, Joe has made profits of £15,000 in the ‘transition part’ period.
3. Calculate any overlap relief. Joe has overlap relief of £500.
4. Deduct the overlap relief from the ‘transition part’ profits. For Joe this will be £14,500 (£15,000 less £500).
5. Then add the amount from step 4 above to the ‘standard part’ losses. For Joe this will be £14,500 (from step 4) less the ‘standard part’ loss (from step 1), so £14,500 less £8,000 will result in an overall profit of £6,500.

As Joe has made an overall profit of £6,500 after deducting the ‘standard part’ loss, this means all the overall profit (£6,500) will be spread over the five tax years, 2023/24 to 2027/28. For more information on spreading see the heading of Spreading additional profits in the transition period below.

Loss in the ‘transition part’ after overlap relief, but profit overall

The overall profit (after deducting the loss and overlap relief) will be taxed in full in the 2023/24 tax year. The profit will not be spread over five years.

Example: Alyssa

This example uses the calculation steps outlined under the heading Calculating taxable profits in the transition period above.

Alyssa prepares her accounts to 31 December each year. For the accounting period ended 31 December 2023, she makes profits of £21,000 and for the transition part (1 January 2024 – 5 April 2024) she makes a loss of £3,500. Alyssa also has unused overlap relief of £2,000.

She uses the steps below:

1. Calculate the ‘standard part’ profits. For Alyssa, her ‘standard part’ profits are the taxable profits for the 12-month period which would usually end within the 2023/24 tax year. So, her profits for the accounting year ended 31 December 2023 – this is £21,000.
2. Calculate the ‘transition part’ losses. For Alyssa, the 'transition part’ losses are the losses made during the period from the end of the ‘standard part’ to 5 April 2024. So, from 1 January 2024 to 5 April 2024, Alyssa made a loss of £3,500.
3. Calculate any overlap relief. Alyssa has overlap relief of £2,000.
4. Deduct the overlap relief from the ‘transition part’ losses. As Alyssa has made a loss in the ‘transition part’, she will add the overlap relief to this loss, increasing the loss. This will be a loss of £5,500 (£3,500 + £2,000).
5. Then add the amount from step 4 above to the ‘standard part’ profits. As Alyssa has made an overall loss in step 4, this will in effect be deducted from the 'standard part’ profit (from step 1). So, £21,000 less £5,500 gives £15,500.

As Alyssa has made an overall profit of £15,500 after deducting the ‘transition part’ loss and overlap relief. This means all of the overall profit (£15,500) will be treated as taxable income within the 2023/24 tax year. Alyssa will not be able to spread any profit over the five tax years 2023/24 to 2027/28.

Overall loss

In this case you may be able to use special terminal loss rules. These are complicated and are explained in our loss guidance and in HMRC’s Business Income Manual.

Spreading additional profits in the transition period

If there is a ‘transition part’ profit after deducting overlap relief (see the heading Overlap relief above for more information) and any ‘standard part’ losses then the ‘net’ profit calculated during the 2023/24 tax year will be automatically spread evenly over five tax years: 2023/24, 2024/25, 2025/26, 2026/27 and 2027/28. This means that 20% of the ‘net’ profit will be taxed in each of these years.

So, if the ‘net transition part’ profits are £2,500, then £500 (£2,500 x 20%) will be treated as arising in each of the five tax years and will be subject to tax and National Insurance contributions based on that tax year’s tax rates and thresholds.

As explained above under the heading Loss in the transition period, the profits that can be spread are affected by any losses made

It is possible to make an election to include additional ‘transition part’ profits as arising earlier in the five-year spreading period. However, you cannot postpone any spreading to a later tax year.

An election must state the amount of ‘transition part’ profits that the taxpayer wants to be treated as arising in the tax year and it must be made on or before 12-months after the online filing deadline, 31 January. So, in the above example if you decide that you want to pay tax on all of the ‘transition part’ profits of £2,500 in the first year of spreading (2023/24 tax year) then you will need to make an election saying that you want all of the ‘transition part’ profits to be treated as arising in the 2023/24 tax year by 31 January 2026.

There may be reasons why you may choose not to spread the profits equally over the five tax years. For example, you may expect to move into a higher rate tax band in the following tax year so you would rather treat all the ‘transition part’ profits as arising in the current tax year, or you have made losses after the 2023/24 tax year which you can use against the ‘transition part’ profits.

If you elect to accelerate payments, then the effect of the election will be to proportionally reduce the spread of future ‘transition part’ profits using this calculation:

A x 5/T

Where:

• A is the additional amount of ‘transition part’ profits treated as arising in the tax year (the tax year the election has been made for), and
• T is the number of tax years left to spread after the election tax year (potentially four tax years: 2024/25, 2025/26, 2026/27 and 2027/28)

The examples below illustrate how spreading works and some of the interactions you may want to consider, such as moving into a higher tax band or making a loss in your business.

If you have ‘transition part’ profits and stop trading before the 2027/28 tax year, then all the remaining ‘transition part’ profits will be treated as arising in the year you ceased trading. 

  You can’t use the spreading rules outlined above if, when calculating your taxable profits for the 2023/24 tax year, there is a loss for the (‘transition part’ profits less overlap relief) but you have an overall profit when including your ‘standard part’ profit. The profit will be taxed in the 2023/24 tax year only. For more information see under the heading Loss in the transition period above.

Spreading transition part profits and payments on account

Spreading the ‘transition part’ profits may also affect your payments on account  (such as for the 2028/29 tax year, as that will be the first year without any extra ‘transition part’ profits). So, depending on the actual profits for that tax year, this could result in you overpaying if you do not adjust your payments on account. Accelerating the spread of ‘transition part’ profits (as illustrated in the example of Mila above) can also result in overpaying your payments on account.

If this happens, you can apply to reduce the payments on account (see our guidance for more information).

How tax is calculated

For the 2023/24 tax year, there will effectively be two components of the tax calculation:

1. First component – to work out tax for the ‘standard part’ profit, so the 12-months for the accounting period ending during the 2023/24 tax year.
2. Second component – there will also be a calculation to work out tax for the ‘transition part’ profit after any deduction for overlap relief. The ‘transition part’ profit may be reduced to take account of spreading (as explained under the heading Spreading additional profits in the transition period above).

The tax on the two elements of the calculation is combined later to give the overall tax due.

The reason for treating the ‘transition part’ profits as a separate component of the tax calculation is for it to reduce the impact on certain benefits and allowances (see the list below).

The tax calculation is complex and a number of examples can be found in HMRC’s Business income manual which you can refer to if you want to know more.

Benefits and allowances

High income child benefit charge (HICBC)

The HICBC rules will apply to the ‘standard part’ profit only. It will not be affected by any ‘transitional part’ profit spread over the 2023/24- 2027/28 tax years.

Tax-free childcare

The tax-free childcare adjusted net income threshold applies to the ‘standard part’ profit only. It should not be affected by any ‘transitional part’ profit spread over the five tax years (2023/24 to 2027/28).

Marriage allowance

The marriage allowance rules (allowing the transfer of part of your personal allowance to your spouse or civil partner as a tax reducer) can continue to be claimed as usual and can be offset against the ‘transition part’ profits.

Tax credits and universal credit

See our information under the heading Tax credits and universal credit below.

Pension contributions

The ‘transition part’ profits can be included in the amount of earnings for pension contribution purposes.

Student loans

Basis period reform may affect student loan finance applications and the repayment of student loans.

For student finance applications, the ‘transition part’ profits will be included as household taxable income when applying for more than the basic maintenance loan.

When calculating student loan repayments, the ‘transition part’ profits will be included as part of total earnings for the calculation of repayments made through the self assessment tax system.

Tax credits and universal credit

Tax credits

For tax credits, the usual rules have been changed so only ‘standard part’ profits will be included when calculating any awards for tax credits. This means that the ‘transition part’ profits should not be included when providing information for your tax credits ‘renewal process’. 

Universal credit

Profits from self-employment are calculated differently and separately for universal credit (UC) and tax purposes. For UC, they are calculated and reported to the Department for Work and Pensions (DWP) for each monthly assessment period. This means that any spread of ‘transition part’ profits or use of overlap relief should not directly affect any UC calculation.

However, UC awards may be affected by basis period reform indirectly. For example, this can happen where any additional tax or National Insurance contributions arising from the ‘transition part’ profits (which would usually be spread over five tax years, 2023/24 to 2027/28) are paid in an assessment period. See our page Universal credit and self-employment for step-by-step guidance on how monthly accounts are calculated for UC purposes.

More information

We understand that HMRC is looking at how it can support unrepresented taxpayers affected by basis period reform with their 2023/24 tax returns. We will update this guidance when HMRC has confirmed what support it can provide in addition to providing information on overlap relief (as explained under the heading How to find out about available overlap relief above).

HMRC’s Business Income Manual contains detailed information about basis period reform and how profits are calculated in the transition period (2023/24 tax year) and how tax is calculated when there are ‘transition part’ profits during the 2023/24 to 2027/28 tax years. There is also guidance covering losses and how basis period reform interacts with the averaging rules for farmers and creative artists.

If you are on a low income and cannot afford professional advice, then the tax charity TaxAid may be able to help you.