Basis Period Reform

Who is affected by basis period reform

Basis period reform (BPR) mainly affects the self-employed (sole traders) and partnerships which do not use an accounting period end date between 31 March to 5 April.

This means any unincorporated business which does not have an accounting period ending on 31 March, 1 April, 2 April, 3 April, 4 April or 5 April will have to make changes to the way they calculate their business profits for their tax returns from the 2023/24 tax year onwards.

Also, if you have an accounting period ending between 31 March and 5 April (including 31 March and 5 April) then you may be affected in the 2023/24 tax year if you have unused overlap relief.

The table below summarises who is affected:

Company	Not affected by BPR
Self-employed and partnerships with a 5 April accounting year-end	Not affected by BPR unless you have unused overlap relief
Self-employed and partnerships with an accounting year-end between 31 March and 4 April	Accounting year-end will be treated as 5 April for BPR (see below) but may be affected by BPR if you have unused overlap relief
Self-employed and partnerships with an accounting period which does not end between 31 March and 5 April	BPR will affect the way you calculate your taxable profits and prepare your tax returns for the 2023/24 tax year onwards- see the guidance below

Basis period reform basics

BPR means that all self-employed individuals and partnerships will have to report their business tax information to HMRC on a tax year basis regardless of their accounting period. A tax year is a 12-month period which runs from 6 April in one year to 5 April in the following year, so the 2024/25 tax year runs from 6 April 2024 to 5 April 2025. This is a change from the current rules.

From 6 April 2024, BPR will result in business profits being assessed and taxed in the tax year in which they arise. This means the business accounts information included on Self Assessment or Partnership tax returns will need to be for the tax year 6 April to 5 April (but see below if you have an accounting end date between 31 March to 4 April).

We explain what a basis period is elsewhere on our website.

As not all self-employed individuals or partnerships currently prepare their accounts to 5 April, the 2023/24 tax year (6 April 2023- 5 April 2024) will be a transition period to the new basis of assessing profits. This may mean that some taxpayers will report profits on their 2023/24 tax return for more than a 12-month period. Reporting profits for a longer period could result in additional tax to pay over five tax years (2023/24-2027/28). The guidance below explains how these additional profits will be assessed and how any additional tax will be calculated and spread. 

If my business has an accounting date ending between 31 March to 4 April

If you currently have an accounting period which ends on any date between 31 March to 4 April (inclusive) then for BPR purposes HMRC will treat your accounting period as effectively ending on 5 April. This is called ‘late accounting date rules’.

This means that you will not need to follow any of the complicated rules under the transition period for BPR. You can still prepare your accounts for your usual accounting period, for example if you have an accounting year-end of 31 March then for the 2024/25 tax year you should report your business profits earned in the period 1 April 2024 – 31 March 2025. Any business income received and/or expenses incurred within these additional days in the 2024/25 tax year, so from 1 April 2025 – 5 April 2025 will be included in the 2025/26 accounts and tax return instead.

You can’t use the ‘late accounting date rules’ in the tax year you cease trading. Also, if you do not want to use the ‘late accounting date rules’ you can elect not to do so, although this will mean having to apportion your business profits from two different accounting periods to report to HMRC on a tax year basis (see below).

⚠️ IMPORTANT - If you have any unused overlap relief then you must use it in the 2023/24 tax year.

If my business doesn’t have an accounting date ending between 31 March and 5 April

Remember any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance when we refer to a 5 April accounting year-end this includes any year-end from 31 March to 5 April.

If your business doesn’t have an accounting date which ends between 31 March and 5 April you will still have to report your business accounting information on a tax year basis on your tax return starting from the 2024/25 tax year. Also, you will fall into the transition rules starting in the 2023/24 tax year.

Unless you change your accounting period (see below) this means you will need to:

• be able to get details from two sets of accounts to prepare your tax return on a tax year basis from 2024/25 onwards; and

• pay income tax and self-employment National Insurance contributions based on the profits for the tax year (which will be different to your accounting profits as shown in the example of Cathy below).

Example- Cathy

Cathy is a self-employed gardener and has a 30 June accounting period end date. For the 2024/25 tax return Cathy must:

• prepare accounts for the two accounting years 1 July 2023 – 30 June 2024 and 1 July 2024 – 30 June 2025, then

• from these two sets of accounts apportion profits on a pro rata basis into the 2024/25 tax year to be reported on her 2024/25 Self Assessment tax return so this will include the following:

  • Profits (or losses) from 6 April 2024 – 30 June 2024 from Cathy’s first set of accounts (1 July 2023- 30 June 2024) and

  • Profits (or losses) from 1 July 2024 – 5 April 2025 from Cathy’s second set of accounts (1 July 2024 – 30 June 2025)

The online filing deadline for Cathy’s 2024/25 Self Assessment tax return will still be 31 January 2026 and her payments dates will also be the same as before BPR. 

This may mean that Cathy has less time to prepare and submit her tax return after the end of her accounting period than she has been used to under the current rules and definitely less time to prepare her tax return when compared to someone using a 5 April accounting year-end.

In the example of Cathy above it is three months fewer than if she had a 5 April year end. But if you were using a far later accounting year-end, say 31 December, then that would only give you one month to complete the second set of accounts which you need to prepare your tax return and submit it by the 31 January online filing deadline (and after the 31 October paper return filing deadline).

For example, if Selma prepared her accounts to 31 December each year, her self-employed profit for her 2025/26 tax return would be made up of 9 months profit from the year ended 31 December 2025 and 3 months profit from the year ended 31 December 2026. The end of the second accounting period (31 December 2026) is AFTER the paper deadline for the 2025/26 tax return of 31 October 2026 and only 1 month before the online filing deadline of 31 January 2027.

In circumstances such as these it may not be possible to finalise profits for the second accounting period in such a short period of time and so it may be necessary to use estimates. We explain more about this below.

Alternatively, you may choose to change your accounting period to match the tax year (so have an accounting period end date of 5 April).

It may be sensible to seriously consider changing the accounting period date to 5 April as it would mean the accounts information will be able to be completed more easily on the respective tax returns. It would also make reporting for Making Tax Digital for income tax (MTD) simpler for businesses who fall into the new MTD regime.

However, you do not have to change your accounting period to the tax year. For some businesses it may be impractical to have an accounting period ending 5 April and so they will choose not to change their accounting date just because of BPR. You can still choose any accounting period which works for you, although any cashflow advantages from having a different accounting year-end (say 30 April) will be lost, as you will need to report your business profits arising on a tax year basis (6 April-5 April) for tax purposes, regardless of the accounting year end date. 

Changing my business’ accounting date to ending between 31 March to 5 April

Remember any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance when we refer to a 5 April accounting year-end this includes any year-end from 31 March to 5 April.

If you do not have an accounting date ending 5 April, then it may be simplest to change your accounting period to match the tax year as this will avoid apportioning accounting profits on your tax returns as explained above.

It is possible to change your accounting period date before the introduction of BPR but certain conditions have to be met. This means that if you decide to change your accounting period within the 2022/23 tax year you will have to meet all of the following conditions:

• You notify HMRC of a change in accounting period on your tax return which is filed on time (the information should be included on box 11 (and in box 12 if applicable) on the self-employment full supplementary pages SA103F);

• The new accounting period date is not longer than 18 months;

• There has not been a change in the accounting period in the last five previous tax years OR there is a commercial reason for changing the accounting period which is notified on the tax return.

If any of these conditions are not met, then the change of accounting period will not be recognised by HMRC. There is additional guidance on changing your accounting period in the 2022/233 tax year on Helpsheet HS222 on GOV.UK.

Changing the accounting period in 2022/23 means that if there is additional profit then you will not be able to use the spreading rules as these are only available when changing your accounting period in the transition period (2023/24). Also, you may end up changing your overlap relief position.

Under BPR, it is possible to change your accounting period within the 2023/24 tax year without having to meet the three conditions listed above. You will also be able to use the spreading rules explained below. However, it does mean that you will have to follow the 2023/24 transition rules which can be complicated depending on individual circumstances. 

Keeping my business’ accounting date when it doesn’t end between 31 March to 5 April (use of estimates and consequences of using estimates)

Because some businesses may keep a different accounting year-end, HMRC understand that some self-employed individuals and partnerships may not have sufficient time to finalise the second set of accounts that they need to be able to calculate their taxable profits for their tax returns before the tax return filing deadline. In these circumstances it will be necessary to use estimated (provisional) accounting information to complete the tax returns. These estimates will probably need to be changed when the later set of business accounts are finalised (probably after the 31 January online tax return filing deadline).

It is possible to change your Self Assessment tax return up to 12-months after the online filing deadline.

So, for the 2024/25 tax year you would need to submit your tax return online by 31 January 2026 (or a paper return by 31 October 2025), and you would then have until 31 January 2027 to amend your tax return to provide accurate information.

For example, if you have a 31 December accounting year-end then for the 2024/25 tax year you will prepare your tax return using:

• Profits for the period from 6 April 2024 to 31 December 2024 (using the ‘2024 accounts’ for the 12-months: 1 January 2024 - 31 December 2024)

• Profits for the period from 1 January 2025 to 5 April 2025 (using the ‘2025 accounts’ for the 12 months: 1 January 2025 - 31 December 2025)

The ‘2024 accounts’ should be prepared and finalised before completing and submitting your 2024/25 tax return as there is 13 months between the end of the accounting period and the online filing deadline, 31 January 2026.

However, there is only one month between the end of the ‘2025 accounts’ (31 December 2025) and the online filing deadline, 31 January 2026. In this scenario it is highly unlikely that you will have been able to prepare a set of final ‘2025 accounts’ to include accurate figures in the 2024/25 tax return. This means you will have to include accurate information from the ‘2024 accounts’ and estimates (provisional figures) from the ‘2025 accounts’. Later, after 31 January 2026, when you finalise the ‘2025 accounts’ it may be the case that you need to amend your 2024/25 tax return for the revised figures from the final ‘2025 accounts’ if the final figures are different to the estimated ones. You will have until 31 January 2027 to amend your tax return. 

Example- Kieran

Kieran is a self-employed music teacher and prepares his accounts to 31 December each year. He doesn’t want to change his accounting period. When preparing his 2024/25 tax return Kieran will need to use information from two sets of accounts as follows:

	Final accounts ending 31.12.2024	Draft accounts ending 31.12.2005
	£	£
Turnover (sales)	27,000	23,500
Less expenses	(4,600)	(4,600)
Profit	22,400	18,900

 

Kieran will need to submit his 2024/25 tax return online by 31 January 2026. To prepare his tax return by this date, he will need to use information from his accounts ending 31 December 2024 (‘2024 accounts’) and accounts ending 31 December 2025 (‘2025 accounts’).

Kieran has not had the opportunity to finalise his expenses (costs) for his 2025 accounts before the 31 January 2026 filing deadline so he will need to estimate a reasonable amount – he decides to use the same total expense figure from his 2024 accounts as he doesn’t think that there were any significant changes in his costs.

Kieran calculates the accounting information for his tax return as follows:

	Amounts from 2024 accounts (6.4.2024 -31.12.2024). 270 days from a 366-day year	Amounts from draft 2025 accounts (1.1.2025 – 5.4.2025). 95 days from a 365-day year	Figures included on Kieran’s 2024/25 tax return
	£	£	£
Turnover	19,918 (27,000 x 270/366)	6,116 (23,500 x 95/365)	26,034 (19,918+6,116)
Less expenses	(3,393) (4,600 x 270/366)	(1,197) (4,600 x 95/365)	(4,590) (3,393+1,197)
Profit	16,525 (22,400 x 270/366)	4,919 (18,900 x 95/365)	21,444 (16,525+4,919)

 

During May, Kieran has time to finish his 2025 accounts and realises that he has underestimated his expenses by £350 as they were actually £4,950 and not £4,600 which he had included as a provisional figure. Kieran amends his 2024/25 tax return to increase his expenses by £91 (£350 x 95/365) before the amendment deadline, 31 January 2027.

When using provisional figures, you should try and use the ‘best estimate’ based on the information you have available when submitting your tax return. The provisional figures should be clearly identified in the tax return and you should tick box 20 on the SA100 tax return confirming that the return contains provisional figures. Also, you may want to include details about the provisional figures in the ‘any other information’ box 19 on page TR7 of your tax return.

Remember to consider any claims and elections for tax reliefs as some have a 12-month deadline after the filing deadline. So following the example above, some claims and elections may have a deadline of 31 January 2027.

Filing an amended return will also increase the time that HMRC have to open an enquiry into the tax return.

Also, any amendments to the tax return will result in a re-calculation of the amount of income tax and Class 2 and Class 4 National Insurance contributions due. Late payment interest will be charged on any additional tax and Class 4 National insurance due as a result of the amendment, from the original due date for payment until the actual payment date. 

Starting a new business

Remember any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance when we refer to a 5 April accounting year-end this includes any year-end from 31 March to 5 April.

For tax years before the 2023/24 tax year, there are special rules for what periods the newly self-employed and new partners in partnerships must report their taxable profits for in both the first and second tax year of trading.

If you started to trade during the 2022/23 tax year, then you may want to consider using an accounting end date between 31 March to 5 April.  Although under BPR you can still choose to use any accounting period, by choosing a non-5 April accounting year end it will make completing your tax returns more complicated. This is because from the 2024/25 tax year you need to report your profits made during the tax year to HMRC and this will be different to your accounting profits.

 

⚠️ IMPORTANT – even if you have recently started trading you should check that you do not have any overlap relief to use in the 2023/24 tax year!

If you start trading within the 2023/24 tax year then for tax reporting purposes you will need to include your business profits from the date your trading commenced to 5 April 2024 on your 2023/24 tax return. 

Calculating taxable profits in the transition period

This will usually only affect existing businesses which do not have a 12 month accounting period which ends between 31 March 2024 to 5 April 2024.

Remember any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance when we refer to a 5 April accounting year-end this includes any year-end from 31 March to 5 April.

The 2023/24 tax year will be the start of the transition period where all affected businesses will have their taxable profits/losses adjusted to align them to the new tax year basis. This will be the case whether you prepare your accounts using the cash basis or the accruals basis.

Depending on individual circumstances, for some taxpayers this will result in complicated tax calculations when taking into account overlap relief, spreading of additional tax payments and interactions with some reliefs and non-tax areas. Examples of some of these types of calculations can be found in HMRC’s Business Income manual on GOV.UK. However, below is a basic outline of how the 2023/24 taxable profits will be calculated under BPR shown by the following formula:

‘Standard part’ profits PLUS (‘Transition part’ profits LESS overlap relief).

This calculation works as follows:

1. Calculate your ‘standard part’ profits. ‘Standard part’ profits are the taxable profits for the 12-month period which would usually end within the 2023/24 tax year. So, if you have a 31 October accounting year-end your ‘standard part’ profits are taxable profits for the accounting period - 1 November 2022 to 31 October 2023.

2. Calculate your ‘transition part’ profits. ‘Transition part’ profits are the taxable profits for the period from the end of the ‘standard part’ to 5 April 2024. So, using the example above, the ‘transition part’ profits are the taxable profits for the period 1 November 2023 to 5 April 2024. (It could also be for the period 1 November 2023 to say 31 March 2024, or to say 4 April 2024 under the ‘late accounting date rules’).

3. Calculate your overlap relief. If you have any overlap profits available, you can use overlap relief to reduce taxable profits in the transition period.

4. Deduct your overlap relief from your ‘transition part’ profits

5. Then add the amount from step 4 above to the ‘standard part’ profits

⚠️ Important - the overlap relief is used to reduce any ‘transition part’ profits first.

We show how this calculation works in the example below. 

Example – Amber

Amber has an accounting period ending 31 December. She makes profits of £18,000 in the year-ended 31 December 2023 and £16,500 in the year ended 31 December 2024. She has unrelieved overlap profits of £2,500.

Amber’s 2023/24 taxable profits will be calculated as follows:

‘Standard part’ profits PLUS (‘Transition part’ profits LESS overlap relief).

1. Calculate the ‘standard part’ profits. The ‘standard part’ profits are the taxable profits for the 12-month period which would usually end within the 2023/24 tax year. For Amber this will be the profits for the 12-month accounting period ended 31 December 2023, £18,000.
2. Calculate the ‘transition part’ profits. ‘Transition part’ profits are the taxable profits for the period from the end of the ‘standard part’ to 5 April 2024. So, for Amber the ‘transition part’ runs from 1 January 2024 to 5 April 2024 and the profits will be 96 days* so £16,500 x 96/366 which is £4,328.

3. Calculate any overlap relief. Amber has £2,500 of unrelieved overlap profits which she can use for overlap relief.

4. Deduct the overlap relief from the ‘transition part’ profits. This will be £4,328 less £2,500, which is £1,828.

5. Then add the amount from step 4 above to the ‘standard part’ profits. Amber works out this will be £18,000 + £1,828 = £19,828.

Amber’s total taxable profit under BPR is calculated as £19,828 but she won’t have to pay tax on the total of that amount in the 2023/24 tax year because of the spreading rules which we explain below.

*In the example above, the number of days has been used when calculating the apportionment of profits. However, an alternative method of apportionment suggested by the taxpayer can be accepted by HMRC as long as the apportionment is reasonable and applied consistently (such as apportionment of profits using months rather than days). 

Overlap relief

Remember any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance when we refer to a 5 April accounting year-end this includes any year-end from 31 March to 5 April.

Overlap relief is based on overlap profits, which may arise if you have not always used a 5 April accounting period end. Overlap relief also includes any transitional overlap relief from when Self Assessment was first introduced.

Overlap relief can be used to reduce taxable business profits (and therefore your income tax and self-employment National Insurance contributions).

Our guidance on ‘How do I work out my taxable profits?’ explains how overlap profits arises.

⚠️ IMPORTANT - you must use all your overlap relief in the 2023/24 transition period as any overlap relief not used in this tax year will be ‘lost’ as you will be unable to use it after 5 April 2024.This is the case even if you now have an accounting period which ends between 31 March- 5 April.

How to find out about available overlap relief

Remember any accounting period ending on either 31 March, 1 April, 2 April, 3 April and 4 April will be automatically treated as ending on 5 April unless you make an election. In this guidance when we refer to a 5 April accounting year-end this includes any year-end from 31 March to 5 April.

Even if your business does not have a 5 April accounting period end you may not have any overlap relief to use in the 2023/24 tax year. This may be because:

• You made losses when first starting to trade so never had any overlap profits, or

• You have already used all of your overlap relief in a previous tax year(s) so there is no overlap relief left.

It may also be the case that you have a 5 April accounting period end AND have unused overlap relief because you have changed your accounting period end in an earlier tax year to 5 April but did not use all your overlap relief at that time.  If so, you will have no ‘transition part’ profits as you already use a 5 April accounting year-end This means in the 2023/24 tax year your taxable business profits would be calculated as:

‘Standard part’ profits LESS overlap relief.

If you do have overlap relief then you must use all your overlap relief in the 2023/24 transition period as any overlap relief not used in this tax year will be ‘lost’ as you will be unable to use it after 5 April 2024 even if you are not affected by the other changes under BPR.

If you think you may have overlap relief to use, then it is important to look at your previous tax returns to see if they include the amount of overlap relief available. Overlap profit should have been included on the self-employment full supplementary pages (SA103F) box 70, page SEF 4. Any overlap relief used should have been disclosed at box 69 on the self-employment full supplementary pages (SA103F). To calculate the amount of overlap relief left to use in the 2023/24 tax year you should look at box 70 of the 2022/23 tax return.

It may be the case that you have not kept your tax returns from earlier years, or you may have had overlap profits but not officially recorded the available overlap relief on your tax return. HMRC has indicated that they will try to help affected businesses confirm their overlap relief position.

The easiest way to request information about your overlap relief position from HMRC is to complete a ‘G-Form’ on GOV.UK. You will need to sign into your Government Gateway account to complete the G-Form, and the guidance on GOV.UK lists the information you will need to provide HMRC. HMRC should still try to help you if you have not got all the information asked on the G-Form but it should speed up the process if you can provide as many details about your business as possible. HMRC are aiming to provide information on your available overlap relief within around 15 days and you can request to have the information sent in a letter or on an email.

If you are in a partnership, it is possible that different partners have different amounts of overlap relief available. This could be because partners joined the partnership at different times or have different profit share allocations. 

Loss in the transition period

When calculating your taxable profits in the 2023/24 tax year it may be the case that you have made a trading loss in the ‘standard part’ or the ‘transition part’.

The table below explains how a loss affects the transition period calculation (explained above).

When is the loss?	Consequences
Loss in the ‘standard part’ and profit in the (‘transition part’ less overlap relief) producing an overall profit. See example – Joe below.	The overall profit (after deducting the loss and overlap relief) will be spread over five years.
Profit in the ‘standard part’ and loss in the (‘transition part’ less overlap relief) but producing an overall profit. See example- Alyssa below.	The overall profit (after deducting the loss and overlap relief) will be taxed in full in the 2023/24 tax year. The profit will not be spread over five years.
Overall loss	May be able to use special terminal loss rules. These are complicated and are explained in our loss guidance and in HMRC’s Business Income Manual.

Example- Joe

This example illustrates what happens if you have a loss in the ‘standard part’ and profit in the (‘transition part’ less overlap relief) but when added together there is an overall profit. It uses the calculation steps outlined above.

Joe prepares his accounts to 30 June each year. For the accounting period ended 30 June 2023 he makes a loss of £8,000 and for the ‘transition part’ (1 July 2023 – 5 April 2024) he makes a profit of £15,000. Joe also has unused overlap relief of £500.

Joe needs to understand how the interaction between his loss in the ‘standard part’, profit in the ‘transition part’ and overlap relief interact to see if he will fall into the spreading rules. He uses the steps below:

1. Calculate the ‘standard part’ losses. For Joe, his ‘standard part’ losses are the losses made in the 12-month period which would usually end within the 2023/24 tax year. These are his losses for the accounting year ended 30 June 2023, £8,000.

2. Calculate the ‘transition part’ profits. For Joe the 'transition part’ profits are the taxable profits for the period from the end of the ‘standard part’ to 5 April 2024. So, from 1 July 2023 to 5 April 2024, Joe has made profits of £15,000 in the ‘transition part’ period.

3. Calculate any overlap relief. Joe has overlap relief of £500.

4. Deduct the overlap relief from the ‘transition part’ profits. For Joe this will be £14,500 (£15,000 less £500).

5. Then add the amount from step 4 above to the ‘standard part’ losses. For Joe this will be £14,500 (from step 4) less the ‘standard part’ loss (from step 1), so £14,500 - £8,000 will result in an overall profit of £6,500.

As Joe has made an overall profit of £6,500 after deducting the ‘standard part’ loss, this means all the overall profit (£6,500) will be spread over the five tax years, 2023/24 to 2027/28. 

Example- Alyssa

This example illustrates what happens if you have a profit in the ‘standard part’ and loss in the (‘transition part’ less overlap relief) but when added together there is an overall profit. It uses the calculation steps outlined above.

Alyssa prepares her accounts to 31 December each year. For the accounting period ended 31 December 2023 she makes profits of £21,000 and for the transition part (1 January 2024 – 5 April 2024) she makes a loss of £3,500. Alyssa also has unused overlap relief of £2,000.

Alyssa needs to understand how the interaction between her profits in the ‘standard part’, loss in the ‘transition part’ and overlap relief interact to see if she will fall into the spreading rules. She uses the steps below:

1. Calculate the ‘standard part’ profits. For Alyssa, her ‘standard part’ profits are the taxable profits for the 12-month period which would usually end within the 2023/24 tax year. So, her profits for the accounting year ended 31 December 2023 – this is £21,000.

2. Calculate the ‘transition part’ losses. For Alyssa the 'transition part’ losses are the losses made during the period from the end of the ‘standard part’ to 5 April 2024. So from 1 January 2024 to 5 April 2024 Alyssa made a loss of £3,500.

3. Calculate any overlap relief. Alyssa has overlap relief of £2,000.

4. Deduct the overlap relief from the ‘transition part’ losses. As Alyssa has made a loss in the ‘transition part’, she will add the overlap relief to this loss, so effectively increasing the loss. This will be a loss of £5,500 (£3,500 + £2,000).

5. Then add the amount from step 4 above to the ‘standard part’ profits. As Alyssa has made an overall loss in step 4 this will in effect be deducted from the 'standard part’ profit (from step 1). So £21,000 less £5,500 = £15,500

As Alyssa has made an overall profit of £15,500 after deducting the ‘transition part’ loss and overlap relief, this means all of the overall profit (£15,500) will be treated as taxable income within the 2023/24 tax year. Alyssa will not be able to spread any profit over the five tax years 2023/24 to 2027/28. 

Spreading additional profits in the transition period

As explained above the profits that can be spread are affected by any losses made. However, if there is a ‘transition part’ profit after deducting overlap relief and any ‘standard part’ losses then the ‘net’ profit calculated during the 2023/24 tax year will be automatically spread evenly over five tax years: 2023/24, 2024/25, 2025/26, 2026/27 and 2027/28. This means that 20% of the ‘net’ profit will be taxed in each of these years.

So, if the ‘net transition part’ profits are £2,500 then £500 (£2,500 x 20%) will be treated as arising in each of the five tax years and will be subject to tax and National Insurance contributions based on that tax year’s tax rates and thresholds.

It is possible to make an election to include additional ‘transition part’ profits as arising earlier in the five year spreading period. However, you cannot postpone any spreading to a later tax year.

An election must state the amount of ‘transition part’ profits that the taxpayer wants to be treated as arising in the tax year and it must be made on or before 12-months after the online filing deadline, 31 January. So, in the above example if you decide that you want to pay all of the ‘transition-part’ profits of £2,500 in the first year of spreading (2023/24 tax year) then you will need to make an election saying that you want all of the ‘transition-part’ profits to be treated as arising in the 2023/24 tax year by 31 January 2026.

There may be reasons why you may choose not to spread the profits equally over the five tax years. For example, you expect to move into a higher rate tax band in the following tax year so you would rather treat all the ‘transition part’ profits as arising in the current tax year or you have made losses after the 2023/24 tax year which you can use against the ‘transition part’ profits.

If you elect to accelerate payments, then the effect of the election will be to proportionally reduce the spread of future ‘transition part’ profits using this calculation:

A x 5/T

Whereby:

• A – is the additional amount of ‘transition part’ profits treated as arising in the tax year (the tax year the election has been made for); and

• T – is the number of tax years left to spread after the election tax year (potentially four tax years: 2024/25, 2025/26, 2026/27 and 2027/28)

The examples below illustrate how spreading works and some of the interactions you may want to consider such as moving into a higher tax band or making a loss in your business. 

Example – Delphine (change of tax rate)

Delphine lives in Wales and is self-employed and calculates that after deducting overlap profits she will have net ‘transition part’ profits of £5,000. Her 12-monthly profits are usually £6,000 so below the personal allowance (£12,570) and therefore she does not pay income tax. (Please note we have ignored National Insurance for the purposes of this example).

However, she wins a big contract in the 2024/25 tax year and knows that the profits from this contract will be above £12,570 so she will be paying tax at the basic rate (20%) during that tax year. This will mean that she will be paying tax on any ‘transition part’ profits allocated (spread) to the 2024/25 tax year.

Delphine decides to make an election to change the spreading, so all the ‘transition part’ profits are included in the 2023/24 tax year when she will have no tax to pay as her total taxable profits will be £11,000 (£6,000 + £5,000). This means there will be no ‘transition part’ profits to be spread to the 2024/25 tax year when Delphine is a basic rate taxpayer and so by doing this, she will save £200 tax (calculated as £5,000 ‘transition part’ profits spread over five years so £1,000 per tax year- £1,000 x 20%).

Delphine must make an election to accelerate the spreading to be included in the 2023/24 tax year by 31 January 2026. 

Example- Danny (losses)

Danny lives in England and is self-employed and calculates that during the 2023/24 BPR transition tax year he will have net ‘transition part’ profits of £7,500. Danny usually makes profits of around £20,000 but in the 2025/26 tax year he makes a loss of £9,000. Danny expects he will make his usual profits in the 2026/27 tax year and decides to accelerate the spreading of the ‘transition part’ profits so all remaining profits are used within the 2026/27 tax year. (Please note we have ignored National Insurance for the purposes of this example).

The spreading of the transitional part profits will be as follows:

• 2023/24 tax year As there is no election the ‘transitional part’ profits (£7,500) will be spread equally over five tax years starting in 2023/24.  £1,500 ‘transitional part’ profits will be taxed at 20%, which is £300.

• 2024/25 tax year This will be the same as above so £1,500 ‘transitional part’ profits will be taxed at 20%, so £300 tax.

• 2025/26 tax year Danny makes an election so that the remaining ‘transitional part’ profits are included within this tax year. This will mean ‘transitional part’ profits of £4,500 (£7,500 less £1,500 less £1,500) will be included as profits. However, as Danny has made losses of £9,000 these can be used against the £4,500 profits so that Danny has no tax to pay on the rest of the ‘transitional part’ profits.

• 2026/27 and 2027/28 tax years No transitional part profits are included as it has all been used in earlier years.

Danny must make an election to accelerate the spreading to be included in the 2025/26 tax year by 31 January 2028. 

Example – Mila (change of spreading twice over five tax years)

Mila is self-employed and prepares her accounts to 31 December. For the 2023/24 tax year she works out that she will have total ‘transition part’ profits of £18,000. If no election is made then £3,600 (£18,000 x 20%) ‘transition part’ profits will be treated as arising in each of the five tax years, 2023/24 to 2027/28.

Mila decides to make an election for the 2024/25 tax year to treat an additional £4,000 ‘transition part’ profit as arising within the 2024/25 tax year The table below shows what ‘transition part’ profits are included in the 2023/24, 2024/25 and 2025/26 tax years as part of the spreading process:

Tax Year	‘Transition part’ profits treated as arising in the tax year	Calculation of spread profits
2023/24	£3,600	Total ‘transition part’ profits x 20% (as no election made) £18,000 x 20% = £3,600
2024/25	£7,600	Mila makes an election to include additional £4,000 as arising in the 2024/25 tax year (so £3,600 as above AND £4,000 per election)
2025/26	£2,267	Following the election in 2024/25, Mila will need to reduce the amount of ‘transition part’ profits using the formula: A x 5/T A is the additional amount of ‘transition part’ profits used in 2024/25 (£4,000) and T is the number of years left to spread the ‘transition part’ profits (3 years- 2025/26, 2026/27 and 2027/28) So, £4,000 x 5/3 = £6,667 Mila will need to reduce the total ‘transition part’ profits by £6,667 £18,000- £6,667 = £11,333 (this is the amount of ‘transition part’ profits to be now used in the spreading calculations) The spread amount of ‘transition part’ profits is now: £11,333 x 20% = £2,267

Furthermore, during the 2026/27 tax year Mila decides to make another election- this time to treat an additional £1,500 as arising in the 2026/27 tax year. The table below shows what ‘transition part’ profits are included in each tax year as part of the spreading process:

Tax Year	‘Transition part’ profits treated as arising in the tax year	Calculation of spread profits
2026/27	£3,767	Mila makes an election to include an additional £1,500 ‘transition part’ profits as arising in the 2026/27 tax year (so £2,267 as calculated above) AND £1,500 per election
2027/28	£766	Following the election in 2026/27 Mila will need to reduce the amount of ‘transition part’ profits using the formula: A x 5/T A is the additional amount of ‘transition part’ profits used in 2026/27 (£1,500) and T is the number of years left to spread the ‘transition part’ profits (1 year) So £1,500 x 5/1 = £7,500 Mila then needs to reduce the total ‘transition part’ profits by £7,500 £11,333 (see 2025/26 tax year above) less £7,500 = £3,833. The spread amount of ‘transition part’ profit is £3,833 x 20% = £766 Mila can check this by calculating the remaining ‘transition part’ profit left to be taxed in the final year of spreading: £18,000 less £3,600 less £7,600 less £2,267 less £3,767 = £766

 

If you have ‘transition part’ profits and stop trading before the 2027/28 tax year, then all the remaining ‘transition part’ profits will be treated as arising in the year you ceased trading. 

Example - Rhys

Rhys is self-employed and has total ‘transition part’ profits of £3,000 in the 2023/24 tax year. The ‘transition part’ profits will be spread over five tax years so that £600 (£3,000 x 20%) will be treated as arising in each of the 2023/24 to 2027/28 tax years.

Rhys decides to stop trading during the 2026/27 tax year. He has already been taxed on £600 profits in each of the three tax years (2023/24, 2024/25, 2025/26) and therefore has £1,200 ‘transition part’ profits still to be taxed. This remaining £1,200 will be treated as arising in the final year of trading, 2026/27. There will be no ‘transition part’ profits included in the 2027/28 tax year.

⚠️ You can’t use the spreading rules outlined above, if when calculating your taxable profits for the 2023/24 tax year there is a loss for the (‘transition part’ profits less overlap relief) but you have an overall profit when including your ‘standard part’ profit. The profit will be taxed in the 2023/24 tax year only.

How will spreading my transition part profits affect my payments on account?

Spreading the ‘transition part’ profits may also affect your payments on account, for example for the 2028/29 tax year as that will be the first year without any extra ‘transition part’ profits, and so, depending on the actual profits for that tax year, this could result in you overpaying if you do not adjust the payments on account.  Accelerating the spread of ‘transition part’ profits (as illustrated in the example of Mila above) can also result in overpaying your payments on account.

If this happens you can apply to reduce the payments on account (see our guidance for more information). 

How tax is calculated under basis period reform

For the 2023/24 tax year, there will effectively be two components of the tax calculation:

First component - to work out tax for the ‘standard part’ profit, so the 12-months for the accounting period ending during the 2023/24 tax year.

Second component - there will also be a calculation to work out tax for the ‘transition part’ profit after any deduction for overlap relief. The ‘transition part’ profit may be reduced to take account of spreading (as explained above).

The tax on the two elements of the calculation is combined later to give the overall tax due.

The reason for treating the ‘transition part’ profits as a separate component of the tax calculation is for it to reduce the impact on certain benefits and allowances (see list below)

The tax calculation is complex and a number of examples can be found in HMRC’s Business Income Manual. which you can refer to if you want to know more.

Interactions with benefits, allowances and student loans

• High Income Child Benefit Charge (HICBC)- the HICBC rules will apply to the ‘standard part’ profit only. It will not be affected by any ‘transitional part’ profit spread over the 2023/24- 2027/28 tax years.

• Tax free childcare - the tax-free childcare adjusted net income threshold applies to the ‘standard part’ profit only. It should not be affected by any ‘transitional part’ profit spread over the five tax years (2023/24-2027/28).

• Marriage allowance - the marriage allowance rules allowing the transfer of part of your personal allowance to your spouse or civil partner as a tax credit, should continue to be claimed as usual and can be offset against the ‘transition part’ profits.

• Tax credits and universal credit - see our separate section below.

• Pension contributions - the ‘transition part’ profits can be included in the amount of earnings for pension contribution purposes.

• Student finance applications – the ‘transition part’ profits will be included as household taxable income when applying for more than the basic maintenance loan.
  Student loans –the ‘transition part’ profits will be included as part of total earnings when calculating any student loan repayments made through the Self Assessment tax system. 

How basis period reform affects tax credits and universal credit

Tax credits

For tax credits, the usual rules have been changed so only ‘standard part’ profits will be included when calculating any awards for tax credits. This means that the ‘transition part’ profits should not be included when providing information for your tax credits ‘renewal process’. We understand that any overlap relief used in the 2023/24 tax year should be included on your Self Assessment tax return (SA103F self-employment full supplementary pages) and this will reduce your ‘standard part’ profits used for tax credits.

Universal Credit (UC)

Profits from self-employment are calculated differently and separately for UC and tax purposes. For UC, they are calculated and reported to the Department for Work and Pensions (DWP) for each monthly assessment period. This means that any spread of ‘transition part’ profits or use of overlap relief should not directly affect any UC calculation.

However, UC awards may be affected by BPR indirectly for example, where any additional tax or National Insurance contributions arising from the ‘transition part’ profits (which would usually be spread over five tax years, 2023/24 to 2027/28) are paid in an assessment period. See our webpage, ‘How do I work out my profits for universal credit?’ for step-by-step guidance on how monthly accounts are calculated for UC purposes. 

Getting extra help

We understand that HMRC is looking at how it can support unrepresented taxpayers affected by BPR with their 2023/24 tax returns. We will update this guidance when HMRC has confirmed what support it can provide.

HMRC’s Business Income Manual contains detailed information about BPR and how profits are calculated in the transition period (2023/24 tax year) and how tax is calculated when there are ‘transition part’ profits during the 2023/24 to 2027/28 tax years. There is also guidance covering losses and how BPR interacts with the averaging rules for farmers and creative artists.

If you are on a low income and cannot afford professional advice then the tax charity, TaxAid may be able to help you.