Basis Period Reform: The Tax Year Basis for Sole Traders in 2026

The UK tax system for sole traders and partnerships changed significantly from 6 April 2024. HMRC introduced Basis Period Reform, which means businesses now report profits using the tax year basis instead of the previous current year basis.

If your business does not prepare accounts to 31 March or 5 April, these changes may affect how your profits are calculated for Self Assessment.

What Changed in April 2024?

Before April 2024, unincorporated businesses were taxed using the current year basis, meaning profits were taxed based on the accounting period ending in the tax year.

Since 6 April 2024, businesses must instead report profits for the tax year itself.

This means profits reported on your Self Assessment tax return must cover:

6 April to 5 April each year

These rules apply to:

• Sole traders
• Partnerships
• Members of limited liability partnerships (LLPs)

The reform does not apply to limited companies, which continue to pay corporation tax based on their accounting periods.

Which Businesses Are Affected?

The change mainly affects businesses whose accounting year end does not fall between 31 March and 5 April.

For example, businesses with year ends such as:

• 30 June
• 30 September
• 31 December

may now need to apportion profits from two accounting periods when preparing their Self Assessment returns.

How Profit Apportionment Works

If your accounting year does not align with the tax year, you may need to combine profits from two sets of accounts to determine the correct figure for the tax return.

For example, if your accounting year end is 31 December, your 2025/26 Self Assessment return will include profits from:

• 1 January 2025 to 31 December 2025, and
• 1 January 2026 to 5 April 2026

Because the second period’s accounts may not yet be finalised, businesses often need to estimate profits initially, then correct the figures in the following year once the accounts are completed.

The 2023/24 Transition Year

The 2023/24 tax year was used as a transition year to move businesses from the old system to the tax year basis.

In some cases, businesses had to report profits covering more than 12 months, potentially up to 23 months of profits.

To prevent large one-off tax bills, HMRC introduced two important measures:

Overlap Relief
Previously taxed profits from the start of the business could be deducted.

Spreading of Transition Profits
Remaining transition profits can be spread over five tax years (2023/24 to 2027/28).

This means many businesses are still paying tax on these spread transition profits in 2026.

Should You Change Your Accounting Date?

Businesses are not required to change their accounting year end.

However, many accountants recommend aligning accounts with the tax year (31 March or 5 April) because it can:

• Simplify tax reporting
• Reduce the need for estimated figures
• Avoid administrative complexity

Businesses that keep a different year end may need to continue apportioning profits each year.

Key Points for Businesses in 2026

• Sole traders and partnerships now use the tax year basis.
• Profits must reflect the period 6 April to 5 April each year.
• Businesses with different year ends may need to combine profits from two accounting periods.
• Transition profits may still be taxed until 2027/28.
• Aligning accounts with 31 March or 5 April can simplify reporting.

Need Advice on Basis Period Reform?

The new rules can make profit calculations more complex, especially for businesses with non-standard accounting year ends.

At Merranti Accounting, we help businesses:

• Calculate profits under the tax year basis
• Manage transition profit spreading
• Review whether changing the accounting date would be beneficial
• Ensure Self Assessment compliance

If you would like help reviewing how these changes affect your business, get in touch with Merranti Accounting today.