What Happens to Overlap Relief After Basis Period Reform?
From April 2024, HMRC introduced a major structural change to how sole traders and partnerships are taxed: the basis period reform. The old “current year” basis was replaced with a new tax year basis, aligning all business profits with the standard tax year (6 April to 5 April).
But this change has created one last opportunity — and a potential pitfall — for unincorporated businesses: the final use of overlap relief in the 2025/26 tax year.
In this post, we’ll explain:
- What overlap relief is
- Who has it and why
- How it can be used in 2025/26
- What happens if you miss the opportunity to claim it
What Was the Old System?
Until 5 April 2024, sole traders and partnerships were taxed using the current year basis. This meant:
- You were taxed on the profits of your accounting period ending in the tax year.
- For example, if your accounting year ended 31 December 2022, those profits were taxed in 2022/23.
The problem? In your first years of trading, some profits could be taxed more than once — especially if your first accounts covered more than 12 months or your year-end didn’t align with the tax year.
This created something called overlap profits — and HMRC gave you overlap relief to reclaim that overpaid tax, but only when you ceased trading or changed your accounting date.
What Changed from April 2024?
From 2024/25, the tax year basis applies to all unincorporated businesses.
This means:
- You are taxed on profits earned between 6 April and 5 April, regardless of your accounting year-end.
- If your year-end isn’t 5 April (or 31 March, which HMRC accepts as equivalent), you must apportion profits across two sets of accounts to match the tax year.
The 2023/24 Transition Year: Where Overlap Relief Was First Used
In the 2023/24 tax year, HMRC gave businesses with non-tax year accounting dates the option to spread their transition profits over up to five years, to ease the tax burden.
This was also the first point at which overlap relief was applied.
For many, the overlap relief:
- Reduced the transition profit in 2023/24
- Lowered the total amount of profit subject to tax
- Helped reduce the immediate impact of basis period reform
However, not all overlap profits may have been used — and the last opportunity to use any remaining relief is in 2025/26 if you cease trading or change accounting date.
Final Use of Overlap Relief: 2025/26 Deadline
HMRC has confirmed that 2025/26 is the final year in which overlap relief can be used. After that, it will be lost — regardless of how or when the overlap profit arose.
You can still use overlap relief in 2025/26 if:
- You cease trading in that tax year
- You change your accounting year-end to 31 March or 5 April during the year
- You already started spreading transition profits in 2023/24, and continue into 2025/26
If none of these apply, and you don’t act by 5 April 2026, any remaining overlap relief expires.
Do I Have Overlap Relief?
You might have overlap relief if:
- You started trading before 2024/25, and
- Your accounting year-end was not 31 March or 5 April, and
- You had an accounting period longer than 12 months in your opening year or early overlap years
Unfortunately, many businesses don’t know if they have overlap relief because:
- They started trading years ago
- The figures were never shown clearly on previous tax returns
- Their accountant has changed, or records are incomplete
HMRC Help
HMRC launched an online overlap relief request service to help affected businesses obtain their overlap figures.
You’ll need to provide:
- Your Unique Taxpayer Reference (UTR)
- Approximate date you started trading
- Your accounting year-end
- Details of when you last changed year-end, if ever
It can take several weeks to receive the figure, so don’t leave this until the last minute.
What Happens If You Don’t Use It?
Any unclaimed overlap relief will be permanently lost after 5 April 2026. This could result in:
- Paying tax twice on some early years’ profits
- Higher tax bills if you cease trading in future years but have no relief left to claim
- A missed opportunity to reduce current tax liabilities
For some businesses, this could mean thousands of pounds in avoidable tax.
Should You Change Your Accounting Date Now?
Many unincorporated businesses have already changed their year-end to 31 March or 5 April to align with the tax year.
However, if you haven’t yet done this, 2025/26 is your last chance to:
- Change your accounting date
- Trigger use of overlap relief
- Move to a simpler, aligned year-end going forward
Changing your year-end will trigger transition profits, but:
- You can spread those profits over up to five years
- You can reduce those profits using your remaining overlap relief
This can offer both simplification and a tax saving — particularly if you’re still early in your transition phase.
Should You Cease Trading?
Some business owners are considering retirement or incorporation in 2025/26, and may want to bring forward that change to use up their overlap relief.
If you’re thinking of:
- Stopping self-employment
- Incorporating into a limited company
- Merging or restructuring
Then doing so before 5 April 2026 could allow you to:
- Apply your overlap relief in your final tax year
- Reduce your final tax bill
- Avoid losing relief forever
Summary: Final Opportunity for Overlap Relief
The move to the tax year basis is now complete, but there’s still time to review your overlap position — and act before the window closes.
Key actions to take in 2025/26:
- Check if you have overlap relief
- Request your overlap figure from HMRC, if unsure
- Consider changing your accounting date to 31 March or 5 April
- Plan the timing of ceasing trade or incorporating
- Use any remaining overlap relief before 5 April 2026
