Basis Period Reform

What Were Basis Periods?

Under the old rules, you were taxed on the profits of your accounting period ending in the tax year. If your accounts ran to 30 June, you’d be taxed in 2023/24 on profits for the year ending 30 June 2023.^[1]

This created complexity, especially in the early years of a business, where profits could be taxed twice (“overlap profits”).

What Changed

From 2024/25, everyone is taxed on a tax year basis: profits arising between 6 April and 5 April (or 1 April to 31 March, which HMRC treats as equivalent).^[1]

This means all self-employed businesses now report on the same cycle, regardless of their accounting year end.

Why HMRC Changed It

Simplification — everyone on the same basis, easier to understand
MTD alignment — Making Tax Digital uses tax year quarters, so this makes perfect sense
Fairness — no more overlap profits being taxed twice

The Transition Year: 2023/24

2023/24 was the transition year. If your accounting year end wasn’t 31 March or 5 April, you were taxed on:^[2]

Profits from your normal basis period, plus
Additional profits from the end of that period to 5 April 2024

This could result in more than 12 months of profits being taxed in one year. To offset this, you deducted your overlap relief.

Overlap Relief

Overlap relief accumulated in the early years of your trade (when profits were effectively taxed twice under the old rules). In the transition year, this relief was finally deducted, reducing the extra tax that would otherwise be due.^[2]

Don’t know your overlap profit? Check previous tax returns, ask your accountant, or contact HMRC. Many people have overlap profits from when they started trading but never used them.

What It Means for You Now

From 2024/25 onwards:^[5]

If your year-end is 31 March or 5 April: nothing changes — your accounting year already aligns
If your year-end is any other date: you must apportion profits to fit the tax year

Apportioning Profits

If your year-end doesn’t match the tax year, you apportion profits from two accounting periods. For example, if your year-end is 30 June:^[4]

2025/26 tax year profits = 3/12 of year ending 30 June 2025 + 9/12 of year ending 30 June 2026

Consider changing your year-end. If your accounting year doesn’t align with the tax year, changing it to 31 March or 5 April eliminates the need for apportionment and simplifies your tax return.

Impact on MTD

Basis period reform aligns perfectly with MTD, which uses tax year quarters (Q1: Apr–Jun, Q2: Jul–Sep, Q3: Oct–Dec, Q4: Jan–Mar). There’s no mismatch between your reporting periods and your tax year.^[1] You can submit these quarterly updates with HMRC-recognised software such as GoFile.

Frequently Asked Questions

What is basis period reform?

Basis period reform changed how self-employed profits are taxed. From 2024/25, all businesses are taxed on profits arising in the tax year (6 April to 5 April), replacing the old rules that used accounting year ends.

Do I need to change my accounting year end?

You are not required to change your accounting year end, but if it does not align with the tax year you will need to apportion profits from two accounting periods. Changing to 31 March or 5 April eliminates this complexity.

What happened to overlap relief?

Overlap relief was deducted in the 2023/24 transition year to offset the extra profits that arose from the move to the tax year basis. If you had overlap profits from when you started trading, they were finally used in that year.

How does basis period reform affect Making Tax Digital?

The reform aligns perfectly with MTD, which uses tax year quarters (April–June, July–September, October–December, January–March). There is no longer a mismatch between reporting periods and the tax year.

Sources

Basis period reform — GOV.UK
Report and pay overlap relief — GOV.UK
Self Assessment tax returns — GOV.UK
Business Income Manual — GOV.UK
How to work out your taxable profits — GOV.UK

Basis Period Reform: What Changed from 2024/25