If your accounting period doesn't end on April 5th, the way HMRC taxes your profits has changed. The old rules you relied on no longer apply, and getting this wrong means either overpaying tax or facing penalties. We're going to walk through exactly what's changed, how to calculate the numbers, and where most sole traders trip up.
How Your Accounting Date and Year-End Relate to the UK Tax Year
Limited companies pick a financial year-end, and file accounts with Companies House accordingly. As a sole trader, you don't have that same formal structure. You can prepare your accounts to whatever date suits you (December 31st, March 31st, June 30th), but HMRC ultimately taxes your profits based on the UK tax year: April 6th to April 5th.
This distinction catches people out. Your "year end" for your own management records might be December 31st, but the profit figure that matters for your Self Assessment return needs to align with the tax year. Under the old system, there was a mechanism linking your chosen accounting date to the tax year. That mechanism has now been replaced.
If you already prepare accounts to March 31st or April 5th, the practical impact is minimal. HMRC treats a March 31st year end as equivalent to April 5th, so no apportionment is needed. But if your accounting date falls on any other date, the new rules directly affect how you calculate and report your taxable profit.
Basis Period Reform: From Accounting Periods to the Tax Year Basis
Under the old "current year basis," HMRC taxed you on the profits from the accounting period ending in the tax year. So if your accounts ran to June 30th, your 2022-23 tax return would include the profits from the year ending June 30, 2022, because that period ended during the 2022-23 tax year.
That system is gone.
From April 6, 2024, HMRC has moved to a "tax year basis." You are now taxed on the actual profits earned between April 6th and April 5th each year, regardless of your accounting date. If you keep a June 30th year-end, you'll need to stitch together profits from parts of two different accounting periods to build the April 6th to April 5th figure HMRC wants.
The immediate question most people ask is, "Do I need to change my accounting year-end?" No, you don't have to. You can keep preparing accounts through June 30th or December 31st or whatever date works for your business. But you will need to apportion those figures to fit the tax year when you complete your self-assessment. More on how to do that shortly.
The 2023-24 Transitional Year: What Happened and Why It Still Matters
The 2023-24 tax year acts as the bridge between the old system and the new one. This is where things get complicated, and where we see the most errors from clients coming to us mid-process.
Here's what happened in 2023-24. You were taxed on your standard 12-month accounting period (as you would have been under the old rules), plus any additional "transitional profits" covering the gap between the end of that period and April 5, 2024.
Take a concrete example. Say your accounting year runs to June 30th:
- Standard period: July 1, 2022 to June 30, 2023 (your normal 12 months)
- Transitional period: July 1, 2023 to April 5, 2024 (an extra 9 months and 5 days)
The profits from both periods are added together for your 2023-24 return. That's potentially 21 months of profit being assessed in a single tax year.
The good news: HMRC allows you to spread those transitional profits over five tax years (2023-24 through 2027-28) to soften the blow. If you don't elect otherwise, they spread automatically in equal instalments. But be aware that any increase in your total income during those years (say from a pay rise in employment income alongside your self-employment) could push you into a higher tax band, making the spread less beneficial than expected.
If you were affected by the 2023-24 transitional rules and are unsure whether your return was completed correctly or whether overlap relief was claimed, it's worth reviewing your position. Errors can still be corrected within HMRC's amendment time limits where applicable.
Understanding and Claiming Overlap Relief
Here's where sole traders can claw back money that's rightfully theirs, and where many leave it on the table.
When you started your business under the old rules, you were likely taxed twice on the same profits during your opening years. This created "overlap profits." The system always intended for you to get relief for this double taxation eventually, either when you changed your accounting date or when you stopped trading. Basis period reform has forced that moment to arrive for everyone at once.
In 2023-24, your overlap relief is deducted from your transitional profits. If your transitional profits are £15,000 and your overlap relief is £6,000, you're only taxed on £9,000 of transitional profit (before any spreading).
The problem: finding your overlap figure. If you've been trading for years, the figure sits in the tax return from your early years of trading, often 10 or 20 years ago. Here's where to look:
1. Your original Self Assessment returns from your first or second year of trading, specifically the self-employment pages
2. Your accountant's working papers from when your business started
3. HMRC's records, though our experience is that HMRC's own data on overlap profits can be incomplete or slow to retrieve
4. SA302 tax calculations from your opening years
If you genuinely cannot find the figure and neither can HMRC, the default is zero. That means you get no relief, and you pay more tax. We've helped clients recover overlap figures going back 15+ years by reconstructing records from old bank statements and invoices. It's painstaking work, but the tax savings often run into thousands of pounds.
This is the last opportunity to claim overlap relief. Once the transitional year is settled, it's gone.
How to Apportion Profits Across Different Accounting Periods
From 2024-25 onwards, if your accounting date differs from the tax year, you'll apportion profits from two accounting periods. The method is straightforward, but precision matters.
Let's work through an example. Your accounting year ends June 30th. For the 2024-25 tax year (April 6, 2024 to April 5, 2025), you need profits from:
- Period A: April 6, 2024 to June 30, 2024 (86 days, falling within your year ending June 30, 2024)
- Period B: July 1, 2024 to April 5, 2025 (279 days, falling within your year ending June 30, 2025)
Suppose your accounts show:
- Year to June 30, 2024: £48,000 profit
- Year to June 30, 2025: £52,000 profit
The calculation:
Period A: £48,000 × (86 ÷ 366) = £11,279
Note: 2024 is a leap year, so the year ending June 30, 2024 contains 366 days.
Period B: £52,000 × (279 ÷ 365) = £39,715
Taxable profit for 2024-25: £11,279 + £39,715 = £50,994
Two common mistakes we see. First, people use 365 days regardless, forgetting leap years. Second, people round the day counts incorrectly. Count actual calendar days, not approximate months.
If your year-end is March 31st, HMRC accepts this as equivalent to April 5th. No apportionment needed. This is one reason some sole traders are switching their accounting date to March 31st: it eliminates the annual apportionment headache entirely.
Reporting Your Income: Self-Assessment and MTD for Income Tax
Your sole trader profits go on your self-assessment tax return. The online filing deadline remains January 31st following the end of the tax year. Under the new rules, the figures you enter must reflect the tax year's profits, using the apportionment method above where necessary.
Making Tax Digital (MTD) for Income Tax is now being introduced. From April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and submit quarterly updates to HMRC. The threshold is scheduled to reduce to £30,000 from April 2027
This is a separate obligation from your annual self-assessment. You'll send summary updates to HMRC every quarter, then file a final declaration at year-end. The quarterly updates don't replace your tax return; they sit alongside it.
If you're currently tracking income and expenses in a spreadsheet or, worse, a shoebox of receipts, now is the time to transition. MTD compliance requires digital records maintained in real time, not reconstructed at year-end.
Choosing the Right Accounting Software for the New Rules
The right software handles apportionment calculations, categorises income and expenses as you go, and is MTD-compatible.
Look for software that is HMRC-recognised for MTD for Income Tax. Not all accounting packages have this status yet. The main options for sole traders include Xero, FreeAgent, and QuickBooks, all of which are working toward or have achieved MTD recognition. At A & Co Accountants, we work with clients across these platforms and can advise on which suits your specific trade and workflow.
What matters most: pick software you'll actually use consistently. The most feature-rich platform in the world is useless if you only log in once a year before your tax deadline. For construction contractors dealing with CIS deductions, or IT freelancers invoicing in multiple currencies, the right choice depends on the specific demands of your work. A platform that handles your invoicing, expense tracking, and bank reconciliation in one place will save hours each month.
Avoid the trap of buying software and assuming it handles everything automatically. You still need to code transactions correctly, reconcile bank feeds, and review the figures. Software is a tool. It's not a substitute for understanding what the numbers mean.
Do the New Rules Apply to Partnerships?
The basis period reform also applies to most partnerships. Like sole traders, partnerships are now taxed using the tax year basis rather than their chosen accounting period. Partnerships with accounting dates that do not align with 31 March or 5 April may need to apportion profits between accounting periods when preparing partnership tax returns. The rules can be more complex where partners join or leave during the year, making professional advice worthwhile.
Your Final Accounting Period When You Stop Trading
If you cease trading, you must tell HMRC within a reasonable timeframe. You can deregister for self-assessment online or by phone. Your cessation date marks the end of your final accounting period.
Your final tax return covers all income and expenses up to your cessation date. Under the new tax year basis, you report profits from April 6th to your cessation date. Any remaining overlap relief that wasn't used during the 2023-24 transition can be claimed on this final return.
If your total trading income is below £1,000 in that final period, the trading allowance may mean you have no taxable profit to report. But you still need to file the return and notify HMRC that you've stopped.
Capital allowances on equipment and vehicles need a final calculation too. When you stop trading, you'll either have a balancing allowance (if the tax written-down value exceeds the sale price of your assets) or a balancing charge (if you sold assets for more than their written-down value). This often catches people out, especially if they sell a van or specialist equipment.
Don't leave your final return to the last minute. We regularly see former sole traders who stopped trading two years ago and never filed their final return, resulting in penalties and estimated tax assessments from HMRC.
Simplifying Your Year-End with Expert Accountant Support
Basis period reform has genuinely increased the complexity of sole trader tax calculations. The transitional year alone involves concepts (overlap relief, profit spreading, apportionment) that most people encounter once in their entire trading life.
At A & Co Accountants, we handle these calculations daily. We've helped sole traders across construction, IT contracting, freelance creative services, and consulting work through the transition, recover forgotten overlap relief, and set up systems that make annual apportionment straightforward going forward.
What we find makes the biggest difference: getting ahead of the problem rather than reacting to it. If you're still unsure whether your 2023-24 transitional profits were calculated correctly, or you're facing your first apportioned return for 2024-25, now is the time to get professional eyes on the numbers. The cost of an accountant is almost always less than the cost of getting it wrong.
We offer fixed pricing so you know what you're paying from day one, and dedicated support so you're not explaining your situation to a different person every time you call. The goal is simple: you focus on your trade, we handle the tax.
If basis period reform has left you with more questions than answers, get in touch with us at A & Co Accountants. We'll review your position, identify any reliefs you're entitled to, and make sure your returns are accurate and filed on time.
Frequently Asked Questions
What Is an Accounting Date?
Your accounting date is simply the date your accounts are prepared to each year. For example, your accounting date might be 31 December or 30 June. The 12 months ending on that date are your accounting period.
Although you can generally choose your accounting date, HMRC now taxes sole traders using the tax year (6 April to 5 April), meaning businesses with a non-standard accounting date may need to apportion profits between two accounting periods.
How does the new tax year basis affect sole traders with a non-April 5th accounting year-end?
From April 6, 2024, sole traders are taxed on profits earned between April 6th and April 5th, regardless of their chosen accounting date. If your accounting year ends on a different date, you will need to apportion profits from two accounting periods to align with the tax year when completing your Self Assessment.
What are 'transitional profits,' and how do sole traders handle them for the 2023-24 tax year?
Transitional profits are additional profits from the period between your normal 12-month accounting year-end and April 5, 2024, assessed in the 2023-24 tax year. You can spread these profits equally over five tax years (2023-24 to 2027-28) to mitigate the increased tax burden.
How do I find my overlap relief amount to reduce my sole trader tax bill?
You can find your overlap relief amount on your original self-assessment returns from your first or second year of trading, your accountant's working papers, or by contacting HMRC. This relief is crucial to deduct from transitional profits in 2023-24, as it is the last opportunity to claim it.
How do sole traders apportion profits to calculate their taxable income for the April 6th to April 5th tax year?
To apportion profits, calculate the daily profit for each relevant accounting period. Then, multiply the daily profit by the number of days from that period that fall within the April 6th to April 5th tax year. Sum these figures to get your total taxable profit. Remember to account for leap years.
Do I have to change my accounting year-end to April 5th because of the new sole trader tax rules?
No, you do not have to change your accounting year-end. You can keep your existing date, such as December 31st or June 30th. However, you will need to apportion your profits from two accounting periods to calculate your taxable profit for each April 6th to April 5th tax year.
What is Making Tax Digital for income tax, and when will it apply to sole traders?
Making Tax Digital (MTD) for Income Tax requires sole traders and landlords with gross income over £50,000 to keep digital records and submit quarterly updates from April 2026. The threshold drops to £30,000 from April 2027, requiring digital record-keeping and quarterly submissions to HMRC.
What happens if I cannot find my overlap relief figure for my sole trader business?
If you genuinely cannot locate your overlap relief figure and neither can HMRC, the default position is zero, meaning you will not receive that relief. Reconstructing records from old bank statements and invoices may be necessary, as tax savings can be substantial.