Basis Period Reform & Transition Profits Check

Since the 2024/25 tax year, sole traders and partners in a trading partnership are taxed on the profits that arise in the tax year itself (6 April to 5 April), rather than on the profits of the accounting year that ends in the tax year. This change, known as basis period reform, was made by Schedule 1 to the Finance Act 2022, which amended the Income Tax (Trading and Other Income) Act 2005. If your accounts run to 5 April, or to any date from 31 March to 4 April, nothing much changes. If your year ends on another date, such as 30 June or 31 December, you now have to apportion profits from two sets of accounts to cover the tax year, and you may need to use estimates on your return and amend them later.

The move to the new rules happened in 2023/24, the transition year. Most people with a non-aligned year end were taxed on more than 12 months of profit that year, and the extra amount (the transition profit, after deducting any overlap relief carried forward from when you started trading) is spread automatically over five tax years, from 2023/24 to 2027/28, unless you choose to bring it in sooner. Each fifth has to be reported on your Self Assessment return, so your 2025/26 return due by 31 January 2027 must still include one. Forgetting the transition profit, using the wrong overlap relief figure or not apportioning profits correctly can lead to underpaid tax, interest and penalties, and it also affects your payments on account and Making Tax Digital quarterly updates.