Basis Period Reform: What Sole Traders Must Do Before the 2025/26 Deadline
The current tax year is the first in which all unincorporated businesses must report profits on a tax year basis, following one of the most significant changes to the UK’s income tax rules in decades: basis period reform.
This new system replaces the old method that allowed businesses to be taxed based on their own accounting period, and instead aligns all reporting with the tax year running from 6 April to 5 April.
While designed to simplify long-term compliance, the short-term consequences are complex and may have tax and cash flow implications — especially for businesses with non-March year ends. If you are a sole trader or part of a partnership, you need to act now to ensure you are ready for full implementation in 2025/26.
What Was the Old Basis?
Under the old rules, known as the current year basis, sole traders and partnerships were taxed on the profits for their accounting year that ended in the relevant tax year.
For example, a business with a 30 June 2023 year-end would be taxed in the 2023/24 tax year based on the profits for the year to 30 June 2023.
This gave flexibility in choosing an accounting date and helped some businesses delay when profits were taxed, particularly useful in early trading years.
What Has Changed?
From the 2024/25 tax year onward, all unincorporated businesses must report profits on a tax year basis — meaning they are taxed on profits actually earned between 6 April and 5 April each year, regardless of their accounting period.
If your business already draws accounts to 31 March or 5 April, this change will have little to no impact. However, businesses with a year-end other than this will now have to apportion profits from two different accounting years to match the tax year, starting from 6 April 2025.
The Transitional Year: 2023/24
To ease businesses into the new system, HMRC introduced a transitional year in 2023/24. During this year:
- You reported profits from the end of your 2022/23 basis period up to 5 April 2024
- This meant many businesses had to report more than 12 months of profits
- You were allowed to deduct any overlap profits (typically from your early trading years when profits were taxed twice)
- The additional “transitional” profits could then be spread over five tax years, starting in 2023/24
Example
Let’s say a sole trader has a 30 September year-end. Under the transitional rules, their 2023/24 tax return covers profits from:
- 1 October 2022 to 30 September 2023 (12 months — their usual accounting period)
- 1 October 2023 to 5 April 2024 (6 months — the “transitional” part)
That’s 18 months of profit to report in one tax year.
To reduce the tax burden, transitional profits (after deducting overlap relief) are automatically spread over five years unless you elect to bring more in earlier.
What’s Required from 2025/26?
From 6 April 2025, the tax year basis becomes mandatory. Businesses will need to report profits actually earned between 6 April and 5 April — not based on when they prepare their accounts.
If You Have a 31 March or 5 April Year-End
You’re already aligned to the tax year. No change is required, and you can continue filing based on your normal accounts.
If You Have a Non-March Year-End
You must now apportion profits from two sets of accounts in your tax return.
Example:
A business with a 30 June year-end will need to include:
- 3 months of profits from the year ending 30 June 2025 (6 April 2025 to 30 June 2025)
- 9 months of profits from the year ending 30 June 2026 (1 July 2025 to 5 April 2026)
This introduces new reporting complications, especially when the second set of accounts hasn’t yet been finalised at the time the tax return is due.
What Are the Risks?
1. Estimation and Amendments
If your second accounting period isn’t finished by 31 January (the self-assessment deadline), you’ll need to estimate your profits. Once your accounts are finalised, you must amend the return with actual figures.
This introduces a risk of:
- Filing errors
- Missed amendments
- Penalties for late or incorrect returns
2. Increased Administration
Every year, you’ll need to:
- Apportion profits between two accounting years
- Estimate if necessary, then amend
- Keep clear records for two periods at once
3. Cash Flow Effects
If your profits are increasing year on year, apportioning future profits means you may bring forward more tax into the current year than under the old system.
Should You Change Your Accounting Date?
One way to avoid these complications is to change your accounting date to 31 March or 5 April, aligning your financial year with the tax year.
Advantages:
- Avoids annual apportionments
- Eliminates the need to estimate and later amend returns
- Simplifies Making Tax Digital compliance from 2026
- Reduces admin costs and risk of error
Considerations:
- May result in one-off higher profits if you’re shifting from a date earlier in the year
- Could affect pension contributions or other profit-based calculations
- May trigger a larger tax bill in the year of change if not planned properly
This decision should be reviewed with your accountant, factoring in trading patterns, cash flow, and past overlap profits.
Overlap Relief: Don’t Miss Out
Many businesses that started trading before the current year basis was fully phased in will have overlap profits — profits taxed twice in their early years.
In the 2023/24 transition year, overlap relief must be claimed in full. If you don’t know your overlap figure, you can request it from HMRC, although turnaround times are often slow.
It’s essential to:
- Review whether you had overlap profits
- Ensure your 2023/24 tax return includes the correct relief
- Keep supporting records in case HMRC queries the claim
Key Actions for Sole Traders and Partnerships
-
Review your accounting year-end
If not aligned to 31 March or 5 April, consider changing it to reduce future admin. -
Understand your 2023/24 transitional profits
Work with your accountant to calculate the portion being spread and how it impacts future years. -
Track estimates carefully in 2025/26
If you must estimate profits, build a reminder system to amend returns later. -
Check your overlap relief position
Request records from HMRC now if needed — do not wait until filing deadlines. -
Plan ahead for Making Tax Digital (MTD)
From April 2026, most sole traders with income over £50,000 must comply with MTD for Income Tax. Having aligned periods will help with quarterly reporting.
Conclusion
Basis period reform is intended to simplify the tax system, but the transitional process creates complexity for many unincorporated businesses. From 2025/26 onwards, the tax year basis is mandatory, and decisions made now — such as changing your accounting year-end — can have long-lasting benefits.
