Basis Period Reform — What the Tax Year Change Means for Self-Employed Trades (2026)

The Old System: The Current Year Basis

Under the old rules, you weren't taxed on the profits of the tax year itself. You were taxed on the profits of the accounting year that ended within the tax year. This was called the "current year basis".

If you drew up your accounts to 5 April every year, this distinction never mattered — your accounting year and the tax year were the same thing. But plenty of trades pick a different year end. A business with a 30 April year end, for example, would have its accounts to 30 April 2023 taxed in the 2023/24 tax year. That created a long lag between earning the money and paying tax on it.

The catch came when you started trading. In your first year or two, some months of profit got taxed twice — once in the opening year and again under the normal current year basis. These doubly-taxed months were called overlap profits, and the tax on them was held as overlap relief — a credit you could only use when you eventually closed the business or changed your accounting date. For many traders that relief sat unused for decades.

The New System: The Tax Year Basis

From 2024/25 onwards, everyone is taxed on the profits that actually arise in the tax year itself — 6 April to 5 April — regardless of when their accounting year ends. This is the "tax year basis".

If your year end isn't already aligned to the end of the tax year, you now have to apportion the profits of two sets of accounts to work out how much falls into each tax year. Say your accounts run to 30 June. For 2024/25 you take roughly the last three months of your year ended 30 June 2024 plus roughly the first nine months of your year ended 30 June 2025, weighted by the number of days in each period. HMRC also allows year ends of 31 March, 1, 2, 3 or 4 April to be treated as equivalent to 5 April, so those traders don't need to apportion anything.

Who Is Affected?

The reform only affects unincorporated businesses — sole traders and partnerships. Limited companies are taxed on their own accounting period under corporation tax and are completely unaffected.

Within the self-employed population, the impact splits into two camps:

• Already aligned (31 March or 5 April year end): Little to no change. Your accounting year already matches the tax year, so the basis reform is mostly invisible to you.
• Misaligned (any other year end): You were caught by the transition and you now have to apportion two accounting periods every year, or change your year end to simplify.

If you're not sure which camp you're in, check the "accounting period" dates on your last few sets of accounts or your self-assessment return. The year-end date is the deciding factor.

The 2023/24 Transition Year

The mechanics had to be reset somewhere, and 2023/24 was the transition year that did it. To move you from being taxed on an accounting year ending in the tax year to being taxed on the tax year itself, HMRC had to bring extra months of profit into charge to "catch up".

For a misaligned business, 2023/24 was split into two parts:

• The standard part: the profits of your normal 12-month accounting period ending in 2023/24, taxed as usual.
• The transition part: the profits from the day after that accounting period ended, right up to 5 April 2024.

Added together, this meant being taxed on more than 12 months of profit in a single tax year. The extra slice is called the transition profit, and for a trade with a year end early in the tax year — say 30 April — it could be almost a full extra year of profit landing in one go.

The Reliefs That Softened the Blow

HMRC didn't expect traders to swallow an extra chunk of tax in one hit, so two reliefs were built into the transition.

Overlap relief

All of that overlap relief built up when you started trading (or last changed your year end) was finally released in the 2023/24 transition year. It was deducted from the transition profit, reducing the extra amount brought into charge. For long-established trades this could be a meaningful figure — but only if it had been correctly recorded over the years. If you didn't know your overlap figure, HMRC ran an online tool and a dedicated request service so you could ask for your historic figures from past returns.

Spreading over five years

After overlap relief, any transition profit that remained is automatically spread evenly over five tax years — 2023/24 to 2027/28 — so you pay the extra tax in five smaller instalments rather than all at once. You can elect to accelerate it (bring more into an earlier year) if it suits your circumstances, for example to use up a year where your other income is low. For most trades, though, the default five-year spread is the kindest on cash flow.

A Worked Example: The 30 June Year End

Take a self-employed groundworker, Dave, who has always drawn up accounts to 30 June and makes a steady £48,000 profit a year. He has £6,000 of overlap relief from when he started trading years ago.

• Standard part (2023/24): profits for the year ended 30 June 2023 — £48,000.
• Transition part: 1 July 2023 to 5 April 2024 — about nine months, so roughly £36,000.
• Less overlap relief: £36,000 − £6,000 = £30,000 of transition profit.
• Spread: that £30,000 is divided by five = £6,000 added to taxable profit each year from 2023/24 to 2027/28.

So instead of a sudden £78,000 hitting his 2023/24 return, Dave is taxed on £54,000 that year (£48,000 + £6,000) and £6,000 of extra transition profit each year for the following four years. Same total tax in the end — but spread to protect his cash flow. Keeping clean, dated records of his income made working all of this out far less painful, which is exactly the kind of bookkeeping Trade2Base is built to make routine.

The Link to Making Tax Digital for Income Tax

Basis period reform wasn't happening in isolation. It was deliberately timed to clear the ground for Making Tax Digital for Income Tax (MTD for ITSA), which requires self-employed people over the income threshold to keep digital records and send HMRC quarterly updates.

Quarterly reporting is far simpler when your tax year and reporting periods line up. If you're still apportioning two odd accounting periods every year, MTD's quarterly cadence becomes a headache. Aligning your year end to the tax year removes that friction in advance — which is one more reason to make the change now rather than later.

What Traders Should Do Now

Even though the transition year has passed, there are still sensible steps to take if you're a misaligned trade.

• Consider changing your accounting date to 31 March or 5 April. This permanently removes the need to apportion two sets of accounts and estimate profits every year. If you don't change it, you'll often be filing on provisional figures and amending later once your second period's accounts are finalised.
• Check your overlap relief was actually claimed. If you went through the transition without claiming the overlap relief you were due, you may have overpaid. Dig out your figures — HMRC's tool and request service exist precisely to recover historic overlap amounts from old returns.
• Budget for the remaining spreading instalments. If you have transition profit being spread, remember it's still inflating your taxable profit each year up to 2027/28. Factor that into your tax set-aside so the extra doesn't catch you out at the January payment.
• Keep clean, continuous income records. The whole reform is easier to handle when your bookkeeping is dated, complete and easy to apportion across periods. This is where a tidy system pays for itself — Trade2Base keeps your invoices and income organised so apportioning across the tax year is a quick job rather than a year-end scramble.

Quick Reference: Old Basis vs New Basis

The Bottom Line

Basis period reform didn't change how much tax you owe over the life of your business — it changed the timing, and in the transition year it pulled extra profit forward. If you were caught by it, the key things are making sure your overlap relief was claimed, knowing your spreading is still running until 2027/28, and seriously considering a move to a 31 March or 5 April year end to make every future year simpler. Get those three things right and the reform becomes a one-off bump rather than an ongoing source of confusion.