Basis period reform: what is it and who does it affect?

Are you feeling puzzled by basis period reform? Does it seem more twisty than a Rubik’s Cube? Like that legendary brain-teaser, the key is to take it one step at a time.

We’re here to help you complete the puzzle in record time, with a clear guide to what basis period reform is and who’ll be affected. 

Let’s start at the beginning: what is a basis period?

For sole traders and partners, there are three important ways you can think about the year: your accounting period, your basis period and the tax year. 

Your accounting period is the time you choose to prepare your accounts for (often a year). Your basis period is the time for which you pay tax. The tax year is a 12-month period used by HMRC, which runs from 6th April to the following 5th April. Tax allowances such as your Personal Allowance and ISA allowance follow the tax year.

Ok, got it… so, what is basis period reform then?

Prior to 6th April 2024, a business’s basis period usually covered the same dates as its accounting year. For example, if your year end was 31st December, then for the tax year 6th April 2022 - 5th April 2023, you would pay tax on the profit you made in the calendar year 2022. This is because your accounting year-end date that fell between 6th April 2022 and 5th April 2023 was 31st December 2022.

Now, however, the rules have changed. 

From 6th April 2024, all self-employed individuals and partners in partnerships have to report their business tax information to HMRC on a tax year basis, regardless of their accounting period. Effectively, everyone’s basis period now runs from 6th April to the following 5th April. This is the new ‘tax year basis’. It simplifies the rules and removes the need for overlap relief going forward. 

Does the change affect me?

According to HMRC’s statistics, 93% of sole traders and 67% of partnerships already have accounting periods aligned to the tax year. If you’re in that majority group, breathe a sigh of relief. You’re already prepared.

If your accounting year end falls between 31st March and 5th April, HMRC will allow you to treat this as falling at the end of the tax year - so you also won’t need to change anything. 

You’ll only need to take action if all of the following are true:

• you’re a sole trader or a partnership for which none of the partners is a limited company
• the business has trading income 
• the business’s accounting year doesn’t line up with the tax year 

Looks like I am affected by basis period reform… what does that mean for my 2023/24 accounting year?

You have until 31st January 2025 to file your Self Assessment for 2023/24. HMRC is treating this as a transitional year. 

That means, in broad terms, that you’ll firstly be taxed on the profit for your accounting year as if the rules weren’t changing (which is called the ‘standard profit’). Then you’ll typically need to work out the profit covering the period from the end of your old accounting year to 5th April 2024 (the ‘transitional profit’). 

For the 2023/24 tax year, you’ll pay tax on the standard profit and on all or part of the transitional profit. Luckily, HMRC allows the transitional profit to be spread over up to five years for tax, so you can choose to pay tax on less of it in 2023/24 and spread the rest of it forward. 

We recommend getting advice from an accountant if you have any questions about standard and transitional profit, especially if your business started in the two years before 5th April 2024, if your business has made a loss, or if your business was carrying any overlap relief. 

What about 2024/25 and beyond?

If it is possible for your business, it might be worth considering changing your accounting period to align with the tax year. There are two main advantages to this decision: more straightforward calculations of your profit going forward; and the maximum amount of time (10 months) between your accounting year-end date and the filing deadline. 

You are, however, free to continue drawing up your accounts to the date that suits you best. If you choose a date that is not between 31st March and 5th April, be aware that you’ll have additional work to do each time you prepare your Self Assessment return. You will need to apportion amounts from two sets of accounts to calculate your taxable profits for each tax year. You will have to prepare your accounts as usual and include the relevant portions on your tax return, and you may also have to estimate your income and costs in some cases.

Can FreeAgent help?

Very much so! For 2023/24 and going forward, FreeAgent will calculate your transitional profits for you and apportion them to the correct basis period for tax. As well as helping you to navigate the new basis period rules, FreeAgent has loads more features to simplify your business accounting. You can use FreeAgent to automate your daily admin, calculate your tax responsibilities and remind you of deadlines. 

Try a 30-day free trial of the friendliest accounting software (ICB Luca Awards 2024, 2023, 2022, 2020 and 2019) and take some pressure off your next tax return.

Originally published 5 April 2024
Last updated 9 January 2025