If you are a sole trader or partner with an accounting year end other than 31 March or 5 April, the basis period reform has affected — and may still be affecting — how much tax you pay. The 2023/24 transition year created a one-off pile of "transition profits" that many traders are still paying tax on in instalments. As we head deeper into 2026, it is worth taking stock.
The reform in a nutshell
Before April 2024, sole traders and partnerships were taxed on the profits of the accounting year ending in the tax year — the "current year basis". A trader with a December year-end included the year ended 31 December 2022 in their 2022/23 return. Profits earned in the early months of a business were taxed twice, with "overlap relief" available only on cessation or year-end change.
From 2024/25 onwards, all sole traders and partnerships must report profits on a tax-year basis (6 April to 5 April). Two consequences flowed from the transition:
- Overlap profits brought forward from the original commencement were finally given back as a deduction in the 2023/24 transition year.
- The "transition profits" — the extra portion of profit needed to bridge the gap between the old year end and 5 April 2024 — are taxed across five tax years (2023/24 to 2027/28) at 20% each year by default, with the option to accelerate.
The compliance reality in 2026
If you had, say, a 30 September year end, your 2023/24 return included profits for the year ended 30 September 2023 plus the "transition" period from 1 October 2023 to 5 April 2024 — a 19-month profit, less overlap relief. The taxable portion of the transition profit (which is the part attributable to 1 October 2023 to 5 April 2024) is being spread, but you must:
- Continue to include 20% of the transition profit on each year's return through to 2027/28.
- Calculate payments on account based on the full tax-year basis profit, not just the regular trading profit.
- Consider whether to accelerate the spreading in a low-income year.
The accelerated election
You can elect to bring forward more than 20% of the transition profit in any given year. This is useful where:
- You have an unusually low-income year (illness, sabbatical, business downturn) and want to use the personal allowance and basic-rate band.
- You have unrelieved losses you want to use against transition profit.
- You expect tax rates or thresholds to be less favourable in future.
The election is irrevocable for that year, so model the outcome carefully. Our Self Assessment team regularly runs five-year projections to identify the optimal acceleration strategy.
Aligning your accounting year end
The reform makes a March year end the path of least resistance. If you are still operating to a non-aligned year (December, September, June), you can change without penalty under HMRC's standard year-end change rules. Considerations:
- A long accounting period (up to 18 months) in the year of change carries one-off accounting costs.
- Cash flow can shift because tax payments compress.
- VAT and PAYE quarter ends do not need to match — but operationally it usually helps.
Knock-on effects for MTD ITSA
MTD ITSA from April 2026 assumes a tax-year basis. If you are reporting on a non-aligned year-end internally, your quarterly updates will need to be re-cut to the tax year. Software vendors offer this but it adds complexity. Aligning your accounting year with the tax year before April 2026 removes this friction entirely.
Partnerships: special considerations
Partnerships are subject to the same reform. The basis period rules apply at the partnership level, but transition profit allocations among partners follow profit-sharing ratios. New partners joining mid-transition can face complex apportionment. If you are a partnership that has not yet finalised the 2023/24 partnership return, get specialist help — the calculations are unforgiving and HMRC enquiries in this area are running hot.
Action checklist
- Confirm the transition profit calculation on your 2023/24 return is correct (and that overlap relief was properly applied).
- Set a calendar reminder for each of the next three Self Assessment seasons to include the 20% transition profit slice.
- Run a five-year projection to see whether acceleration in a particular year saves tax.
- Decide whether to change your accounting year end before April 2026.
For a full review of your basis period position, book a 30-minute call with our team. We can also handle ongoing annual accounts and Self Assessment compliance under one engagement, ensuring the basis period numbers reconcile across years without nasty surprises. Find more on our wider service set on the contact page.