What changed
- The old rules. You were taxed on the profits of the accounting year ending in the tax year, which caused overlap and complexity at the start and end.
- The new rules. From 2024/25 onward, you are taxed on the profits that fall within the tax year itself.
- Apportioning profits. If your accounts do not align with the tax year, you take a slice of two accounting periods to match the tax year.
- Overlap relief. The transition used up historic overlap profits, giving relief for tax paid twice at the start of the business.
What it means for you
If your accounting date is 31 March or close to 5 April, little changes. If it is elsewhere, for example 30 June, your tax return now blends two sets of accounts, and estimates may be needed before the later accounts are finalised. Many businesses have simply moved their accounting date to 31 March to keep life simple.
Where this has landed, now the change is done
Basis period reform is finished. The transition happened in 2023/24 and the tax year basis has applied from 2024/25 onwards. So for 2026/27 there is no reform to prepare for, only consequences to handle.
The rule now is simple to state: unincorporated businesses are taxed on the profits arising in the tax year, 6 April to 5 April, whatever date their accounts are made up to.
What that means if your year end is not 31 March
If you draw accounts to 31 March or 5 April, nothing changes for you. Your accounting period and the tax year already line up.
If your year end is anything else, say 30 September, your taxable profit for 2026/27 has to be built from two sets of accounts, apportioned across the tax year. Part of the year to 30 September 2026 and part of the year to 30 September 2027.
That creates a timing problem, because the second set will not exist by the filing deadline. You are allowed to use provisional figures and amend the return once the real numbers are available. It works, but it means filing twice and it is the main reason many businesses simply changed their year end to 31 March.
Overlap relief has gone, and cannot come back
Under the old rules, businesses with a non March year end were taxed twice on some early profits, and carried forward overlap relief to be used on cessation or a change of year end.
All of that was relieved in full in the transition year. HMRC's position is explicit: you cannot use overlap relief after the 2023/24 tax year. If it was not claimed then, it is gone.
This is worth checking if your 2023/24 return was prepared in a hurry. HMRC ran a service to give people their overlap figure, and returns that were filed without it may have relieved less than they were entitled to. An amendment window may still be open.
Transition profits are still being taxed, including this year
The transition year often produced more than 12 months of profit in one go. Rather than tax all of it at once, the extra, called transition profit, is spread over 5 tax years, 2023/24 to 2027/28, with at least 20% falling into each.
2026/27 carries the fourth of those five instalments. If your business went through the transition, there is still an additional slice of profit in this year's return and again next year, even though the underlying trade may look nothing like it did in 2023.
You can elect to accelerate the remaining amount into an earlier year, which occasionally makes sense if your rates or allowances make it cheaper. Cessation of the business also brings the balance into charge.
Two knock on effects people miss
Transition profits sit outside some calculations. They are excluded from qualifying income for Making Tax Digital, so a large transition slice does not by itself drag you into the regime.
They can still affect your cash flow. Transition profit is taxable profit, so it feeds into payments on account and can push a year's bill well above what the trade itself would suggest. Budget for it rather than being surprised by it in January.
What to do now
If your accounts are already made up to 31 March, do nothing. If they are not, decide whether the annual apportionment and provisional figures are worth living with, or whether changing your accounting date once is the simpler answer. And if you went through the transition, make sure you know how much spread profit is still to come, because two more instalments are still in front of you.
Unsure how the reform affects you?
Apportioning profits and using overlap relief correctly is fiddly. TaxTune works out your position, considers whether to change your accounting date, and files it right.
Let us handle the transition
We calculate your taxable profit under the new rules, apply overlap relief, and advise on your accounting date. Fixed fee, agreed up front.
Frequently asked questions
What is basis period reform?
It changed how sole traders and partnerships are taxed, from the profits of the accounting year ending in the tax year, to the profits arising in the tax year itself, 6 April to 5 April.
Who is affected by basis period reform?
Sole traders and partnerships whose accounting date is not 31 March or close to 5 April are most affected, because their profits now have to be apportioned across tax years.
What is overlap relief?
It gives relief for profits that were taxed twice at the start of your business under the old rules. The transition to the new basis used up any remaining overlap relief.
Should I change my accounting date?
Many businesses have moved their accounting date to 31 March to align with the tax year and avoid apportioning profits across two sets of accounts. Whether it suits you depends on your circumstances.
Do I need estimates on my return?
If your accounts are not finalised in time, you may need to include a provisional figure and amend it later. Aligning your accounting date with the tax year avoids this.