Basis period reform – what sole traders and partners need to know

As of the latest tax year, the UK government has introduced significant reforms to the basis period rules. These changes will impact how sole traders and partners calculate their taxable profits. Understanding these updates is crucial to ensure compliance and fulfil your tax obligations. In this blog, we’ll break down what these reforms mean for you, the key changes to be aware of, and how to manage your transition year.

What is Basis Period Reform? 

Basis Period Reform, introduced on 6 April 2024, changes how taxable profits for unincorporated businesses (sole traders and partnerships) are calculated.  

This tax reform mandates that all individuals will be taxed on business profits arising during the tax year instead of the business year end. 

Who is Impacted by Basis Period Reform? 

This reform affects sole traders and partnerships whose accounting periods do not end on 31 March to 5 April.  

Businesses with different year-ends must transition now to the new basis period. 

When is the Change? 

Starting from tax year 2024/25, all individuals will be taxed on the business profits arising in the tax year. Individuals with a year-end that doesn’t match up to the tax year will have a longer taxable period (the transition year) when completing their 2023/24 tax return.  

This is a shift from the previous method where profits were taxed based on the business’s accounting period. Therefore, sole traders and partnership members whose accounting year end does not align with the tax year end of 31 March to 5 April will need to adjust to this new basis period. 

What Happens During the Transition Year? 

The Transition Year is 2023/24 and serves as a period where: 

  • Taxable profits will be calculated from the end of the 2022/23 basis period to 5 April 2024. 
  • Any overlap profits from the business’s opening years will be deducted. 
  • This could cause a spike in taxable profits, especially for incomes between £100,000 and £125,140 due to personal allowance diminishing. 

How to Manage Transition Year Profits 

You can opt to: 

  • Spread transition profits over five years. 
  • Tax all transition profits in 2023/24.  

Matters to consider when deciding include cash flow, personal allowance withdrawal, potential entry into higher tax bands, and future income tax rate changes.  

We recommend you speak to an expert and discuss your unique financial situation. 

How I do I manage my cashflow during the transition period? 

HMRC is allowing taxpayers to spread the profits from the transition over five years, to ease the burden on businesses. 

Worked Example: 

John, has a 31 December year-end. 

For John’s 2023/24 tax return, he will need to report profits from his accounting period, plus the transitional period up to the end of the 2023/24 tax year. 

So that is 1 January 2023 – 31 December 2023 (John’s accounting year) plus 1 January 2024 – 31 March 2024 (the transitional part). 

You’ll see this is a 15-month basis period for John’s 2023/24 tax return. It is important he gets the right support to manage the transition period, cash flow and ensure HMRC receive accurate payments on time.  

What is overlap relief? 

Some sole traders and partners of partnerships may have been double taxed during the early years of trading. As a result, you could be entitled to overlap relief from HMRC– which an accountants can claim on your behalf during the transitional year 

What are my options if I can’t adjust my accounting year? 

Some businesses might be struggling to adjust their accounting year-end to match the tax year, due to international ties, seasonal business patterns, or compliance obligations. We recommend you get professional advice as soon as possible to discuss options to help with the adjustment and ensure the calculation of profits is correct.   

Practical Implications 

Businesses with a year-end other than 31 March to 5 April will need to split profits from two periods to calculate taxes each year if the accounting year end is not aligned to the tax year end. This could lead to estimated figures for tax returns and adjusting later, leading to more work and higher costs for compliance. 

Why is Basis Period Reform Being Implemented? 

The reform aims to: 

  • Align tax reporting with other forms of tax like property tax. 
  • Simplify the tax system. 
  • Facilitate the implementation of Making Tax Digital, now set for 2026. 

Ultimately, the Basis Period Reform introduces a significant change in how unincorporated businesses (sole traders and partnerships) will report and pay taxes.  

Get in touch today 

The sooner you get in touch the simpler the adjustment will be. Plus you will have a clear understanding of how much you will have to pay. This will give you time to plan and peace of mind.  

Contact us