Home 5 Income Tax 5 Self-employed tax basis period reform
Self employed tax basis period reform

Self-employed tax basis period reform

2 May 2024

The self-employed tax basis period reform has changed the way trading income is allocated to tax years. Under the reforms, the tax basis period has changed from a ‘current year basis’ to a ‘tax year basis’. This means that all sole trader and

The reform of the self-employed tax basis period has altered how we allocate trading income to tax years. The tax basis period has now shifted from a ‘current year basis’ to a ‘tax year basis’ due to these reforms.

Now, all businesses run by sole traders and partnerships need to report their profits on a tax year basis. This starts with the self-assessment return due by 31 January 2025, which covers the 2023-24 tax year, and continues in future years.

Previously, overlapping basis periods could exist under the old rules. These periods taxed profits twice and created ‘overlap relief’, usually given when the business ceased. The new ‘tax year basis’ method has eliminated the basis period rules and stopped further overlap relief creation.

Sole traders and partnership businesses that prepare annual accounts between 31 March and 5 April won’t be affected by these changes. They will continue to file as usual for the 2023-24 accounting year and onwards.

The new rules will take effect in the 2024-25 tax year, with the previous 2023-24 tax year referred to as the ‘transition year’. During this year, all businesses will align their basis periods to the tax year and use all remaining overlap relief against that year’s profits.

We refer to any excess profit (after overlap relief) that covers more than 12 months as ‘transition profit’. By default, we will spread the transitional profit over five tax years, from 2023-24 to 2027-28.

Source: HM Revenue & Customs Tue, 30 Apr 2024 00:00:00 +0100

You may also like these

Here are some more articles that might interest you

Expert Advice

If you’d like more information on anything you’ve read, we’re here and happy to help