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Basis Period Reform - February 3rd 2024

Any unincorporated business that does not make up accounts to 31 March, 5 April, or dates in-between, will have to make changes to the way they calculate taxable profits from 2023/24. Basis period reform will additionally affect all taxpayers who have unused overlap relief.

From the tax year 2024/25, unincorporated businesses will be taxed on their profits arising in the tax year itself, regardless of their accounting date. If your accounts run to a date other than 31 March or 1 to 5 April, you will have to apportion, pro rata, the profits of two accounting periods to arrive at your taxable profit.

Split calculations

For example, if you prepare accounts to 31 December each year, your taxable profit for 2024/25 will consist of nine months of the profits of the year to 31 December 2024 plus three months of the profits of the year to 31 December 2025. Accounts drawn up to 31 March or 1–4 April will normally be treated as being for the tax year.

Individuals with an accounting date late in the tax year are likely to have to estimate their profits for the later accounting period and amend their tax return afterwards. An initial under-estimate may result in late payment interest. Changing your accounting date to 31 March or 5 April would avoid this problem.

Transition year

To move to the tax year basis, 2023/24 is a transitional year. The taxable profits for 2023/24 will consist of two parts:

  • the standard part, namely the profits of your accounting period ending in 2023/24, plus
  • a transitional part – the profits from then to 5 April 2024.

Any unused overlap relief that arose in the past, for example on commencement of the business, will be deducted from the transitional part. The remaining transitional profits will then be spread over the five tax years from 2023/24 to 2027/28.

These profits are normally spread evenly over the five years, but a taxpayer can choose to accelerate them. For example, a basic rate taxpayer might be able to limit taxation at higher rates in later years by bringing profits forward. Similarly you might be able to avoid tapering or loss of your personal allowance by ensuring your taxable income stays below £100,000 each year.

Helpfully, transitional profits are not included in the income calculation for the High Income Child Benefit Charge or the income limits above which the pension contributions annual allowance taper kicks in.