What Is Basis Period Reform and How Does It Affect Sole Traders?

Basis period reform is one of the most significant changes to the UK income tax system for self-employed people in decades. From the 2024/25 tax year, sole traders and business partners are taxed on their profits for the tax year (6 April to 5 April) rather than on the profits of their accounting period ending in the tax year. While this sounds like a technical change, the transition created real cashflow challenges for many businesses.

The Old Basis: Current Year Basis

Before 2024/25, self-employed people were taxed on the profits of the accounting period (their business year) ending in the relevant tax year. A sole trader with a 30 April year end was taxed in 2023/24 on profits for the year ended 30 April 2023. This meant profits from up to 12 months could be reported a year later than they arose. Businesses with year ends close to 5 April effectively deferred tax for up to 12 months.

Overlap Profits

The old system created 'overlap profits' — profits taxed twice at the start of trading. A new business starting on 1 June 2022 with a 31 May year end would have their first year's profits (June 2022 to May 2023) taxed twice: once in the first tax return (as a 'period of account' spanning two tax years), and again as the basis period for 2022/23. The accumulated overlap profits were meant to be relieved when the business ended or changed its accounting date — but for many long-established businesses, overlap profits built up 20 or 30 years ago had been eroded by inflation and provided little real relief.

The Transition Year: 2023/24

The 2023/24 tax year was the transition period. Sole traders moved from their current year basis to the tax year basis. This meant taxing profits for the period from the end of their last basis period (e.g., 30 April 2023) to 5 April 2024 — potentially up to 23 months of profits in one tax year. To ease the cashflow impact, the additional 'transition profits' (the extra profits above a normal year) were spread over 5 years from 2023/24 to 2027/28, net of any overlap profit relief. The spreading was mandatory — you could not opt out, though you could elect to pay more in earlier years if you wished.

The New Tax Year Basis: 2024/25 Onwards

From 2024/25, sole traders are taxed on the profits arising in the tax year (6 April to 5 April). If your accounting year end aligns exactly with 5 April, the change is seamless. If not, you apportion profits from two accounting periods to arrive at the tax year profit. HMRC allows you to use estimates in year and amend once final figures are available — or to keep a 31 March year end, which HMRC treats as equivalent to 5 April.

Changing Your Accounting Date

Many sole traders changed their accounting year end to 31 March or 5 April to simplify compliance under the new rules. If you have a non-April year end, consider whether changing it — having regard to any residual transition profits and the administrative simplicity of a year end aligned to the tax year.