TaxCalc Blog

What is the basis period?

Let's start with the basics. If you're self-employed, you need to pay tax on your profits each year. The period over which your profits are calculated is called the basis period.

Current system (before reform):

Traditionally, if your business has a different financial year-end than the tax year (which runs from April 6th to April 5th), your profits for the year ending in the tax year are used as the basis period. For example, if your financial year runs from January 1st to December 31st, your profits for the year ending December 31st, 2023, would be used for the 2023/24 tax year.

What is basis period reform?

The government has introduced changes known as "basis period reform" to simplify how self-employed individuals are taxed.

New system:

Starting from the 2024/25 tax year, the government is aligning the basis period with the tax year. This means that, regardless of when your business's financial year ends, your taxable profits will be based on profits earned between April 6th and April 5th of the following year.

What is the transitional year?

The tax year 2023/24 is known as the transitional year. During this year, special rules apply to help move from the old system to the new system.

How it works:

In the transitional year, instead of only looking at your normal accounting period, HMRC will calculate your taxable profits by considering your profits for the full 12 months of your last accounting period, plus any additional months up to April 5th, 2024.

Why is this important?

The transition to the new system could result in a higher tax bill for the transitional year because you’re essentially being taxed on more than 12 months of profits.

Smoothing the impact.

To help manage this potential increase, HMRC allows you to spread the additional profit over up to five years. This way, you won’t have to pay tax on the full amount all at once.

Key points to remember.

1. Alignment with the tax year: From 2024/25 onwards, your profits will be based on the tax year (April 6th to April 5th).
2. Transitional year (2023/24): This year is unique because it may result in higher taxable profits due to the inclusion of extra months.
3. Spreading the tax impact: You can spread any extra profits over five years to ease the burden.

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