Income Tax

HMRC’s Basis Period Reform: understanding and calculating transition profits

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Transition profits (also called “transition part profits”) arise from the UK government’s Basis Period Reform, which changed how self-employed individuals and partners in partnerships calculate their taxable profits for Income Tax. Before the reform, businesses could base their taxable profits on accounting periods that didn’t align with the UK tax year (6 April to 5 April). The reform mandates that, from the 2024-25 tax year onward, all unincorporated businesses (sole traders and partnerships) must use a “tax year basis” for taxing profits—meaning profits are taxed based on what arises in the tax year itself, regardless of the accounting date.

The 2023-24 tax year was the “transitional year” where businesses with non-aligned accounting dates had an extended basis period (potentially longer than 12 months). This extension created “transition profits”: the extra profits in the extended period that wouldn’t have been taxed under the old rules. These profits are taxed separately over multiple years to spread the burden.

Eligibility

  • Applies to self-employed sole traders and partners in partnerships (including LLPs) who:
    • Started their business or joined the partnership before 6 April 2023.
    • Had an accounting year-end date not falling on or between 31 March and 5 April (i.e., not aligned with the tax year).
  • Does not apply if:
    • Your accounting date was already aligned.
    • You started business after 5 April 2023.
    • It’s non-trading income (e.g., property or investment income in partnerships).
  • For partnerships: Only trading or professional profits are affected. Each partner’s share is calculated individually based on the Partnership Statement from the partnership’s tax return (SA850). If you joined before 6 April 2022, you’re likely affected.

If you’re unsure, check HMRC Helpsheet HS222 (“How to calculate your taxable profits”) or use HMRC’s online transition profit calculator (not available for complex cases like multiple accounting periods or partnerships with non-trading income).

Step-by-Step Calculation of Transition Profits

Transition profits are calculated once in the 2023-24 tax year (the transitional year). You don’t recalculate them annually; you just spread the remaining amount. Use Working Sheet 3 from HS222 or the HMRC guidance for this.

  1. Identify the Basis Period for 2023-24:
    • The basis period runs from the day after your 2022-23 basis period ended until 5 April 2024 (or your accounting date in 2023-24 if it’s between 31 March and 4 April 2024).
    • Split into:
      • Standard part: The first 12 months (equivalent to a normal basis period).
      • Transition part: The remaining period after the standard part, up to 5 April 2024 (this creates the “extra” profits).
  2. Apportion Profits from Your Accounts:
    • Use your business accounts that overlap the standard and transition parts.
    • Apportion profits proportionally:
      • By days (recommended for accuracy): Profit in part = Total accounting period profit × (Days in part ÷ Total days in accounting period).
        • Include leap day (29 February 2024) if applicable.
      • By months or weeks: If days are impractical, but must be consistent.
    • Adjust for allowable expenses, capital allowances, and other tax adjustments (e.g., private use) as normal.
    • For partnerships: Use the partnership’s overall profits, then apply your profit-sharing ratio to get your share.
  3. Calculate Gross Transition Profits:
    • Sum the apportioned profits for the transition part.
    • Deduct any losses from the standard part (these offset the transition profits first).
  4. Deduct Overlap Relief:
    • Overlap relief is any previously “doubled-up” profits from earlier years (e.g., when you started business or changed accounting dates).
    • Deduct it fully from the transition profits (it can’t be carried forward beyond 2023-24).
    • If unknown, estimate provisionally and amend your return later.
    • Formula: Transition profits = (Apportioned transition part profits – Standard part losses) – Overlap relief.
    • If this results in a negative (loss), no transition profits arise, and the loss can be carried forward as usual.

Example Calculation (from HMRC Guidance)

  • Your accounting period: 1 October 2022 to 30 September 2023 (profit £45,000); 1 October 2023 to 30 September 2024 (profit £75,000).
  • Standard part: 1 October 2022 to 30 September 2023 = £45,000 (all from first accounts).
  • Transition part: 1 October 2023 to 5 April 2024 (188 days out of 366 in second accounts) = £75,000 × (188 ÷ 366) ≈ £38,525.
  • Assume overlap relief: £10,000.
  • No standard losses.
  • Transition profits = £38,525 – £10,000 = £28,525.
  • For a partnership: If your share is 50%, your transition profits = £14,262.50.

Another example (monthly apportionment):

  • Accounts: 1 January 2023 to 31 December 2023 (£50,000 profit); 1 January 2024 to 31 December 2024 (£15,000 profit).
  • Standard part: Full first accounts = £50,000.
  • Transition part: 1 January 2024 to 5 April 2024 (3/12 months) = £15,000 × (3 ÷ 12) = £3,750.
  • Overlap relief: £1,000.
  • Transition profits = £3,750 – £1,000 = £2,750.

Spreading Transition Profits for Taxation

  • Total transition profits are spread over 5 tax years (2023-24 to 2027-28) to avoid a large one-off tax bill.
  • Minimum in 2023-24: At least 20% of the total transition profits (after losses and overlap relief).
  • Remaining amount: Spread equally over the next 4 years (2024-25 to 2027-28), i.e., one-quarter of the remaining each year.
    • If no acceleration in 2023-24: 20% in 2023-24, then 20% of original each subsequent year (since remaining 80% ÷ 4 = 20%).
    • HMRC phrases it as “25% of the remaining transition profits” for 2024-25 onward, but this means one-quarter of the untaxed remainder at that point (ensuring equal spread).
  • If the business ceases before 2027-28, the full remaining amount is taxed in the cessation year.
  • For partnerships: Report your share in Box 16.3 (SA104F full pages) or equivalent. Do not include in Box 9 (basis period adjustment).
  • Losses: Brought-forward losses from earlier years can offset the spread amount each year (up to the spread for that year—Box 16.4 in SA104F). Current-year losses cannot offset transition profits.
  • Averaging (e.g., for farmers/artists): Transition profits are excluded from averaging claims.

Acceleration Options

  • You can elect to accelerate taxation of more than the minimum in any year (e.g., to use allowances or lower tax rates).
  • How: Enter the higher amount (e.g., standard spread + accelerated) in Box 16.3 (partnerships) or equivalent on your Self Assessment return. Provide full details (including accelerated amount) in the “Any other information” box (page TR 7).
  • This reduces the spread in future years proportionally.
  • No reversal once elected.
  • Mandatory acceleration if business ceases early.

For 2024-25 Specifically

  • This is the second year of spreading.
  • Enter 25% of the remaining untaxed transition profits (after 2023-24 amount) in Box 16.3 (SA104F) or calculate via HS222 Working Sheet.
  • If you accelerated in 2023-24, adjust the remaining downward.
  • Partnerships: Use the latest Partnership Statement; if multiple, adjust in Box 9 but exclude transition profits there.
  • If no transition profits were taxed in 2023-24 (e.g., due to losses), spread the full amount over 4 years at 25% each.

How Transition Profits Affect Your Overall Tax Calculation

From the Tax Calculation Summary (SA110 notes):

  • Transition profits are added to your non-savings income (e.g., Box A43 in the working sheet) as a separate charge.
  • To calculate the tax due on them:
    1. Run the full tax calculation worksheet (Sections 1-12) with the transition amount included in non-savings income (up to Box A240—total tax due).
    2. Run it again without the transition amount (get a second A240 figure).
    3. The difference between the two A240 figures is the tax due on the transition profits.
  • This ensures the tax is calculated at your marginal rate, after allowances and other income.
  • Copy to the relevant boxes on SA110 and add to your total tax liability.

Key Tips and Resources

  • Keep records of your calculation, spread amounts, and elections for future returns (amendable up to 12 months after filing).
  • Provisional figures: Allowed if disputing or estimating (e.g., overlap); mark on return and amend by 31 January 2027 for 2024-25.
  • Penalties: Inaccurate reporting can lead to penalties (30-100% of tax due).
  • Further help: HMRC Helpsheet HS222 (includes Working Sheets); HS227 for losses. Search gov.uk for “basis period reform” or use the online calculator. For partnerships, refer to SA104F/S notes and SA850 guidance.
  • If complex (e.g., multiple periods), consult a tax advisor—HMRC won’t calculate for you if you miss deadlines (paper by 31 Oct 2025; online by 31 Jan 2026 for 2024-25).

Reporting self-employment income for tax

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A taxpayer is liable for tax on self-employment income if they meet any of the following, based solely on self-employment receipts (total income before expenses, including turnover, other business income, balancing charges, and goods/services for own use):

  • Total receipts exceed £1,000: Receipts up to £1,000 are exempt via the trading income allowance and do not require reporting, unless from a connected party (e.g., family or related business). If over £1,000, you must file a return and either claim the £1,000 allowance (no expenses or other allowances deductible) or deduct allowable expenses/capital allowances to calculate taxable profits. You cannot claim the allowance to create a loss. The allowance can be split across multiple self-employments but caps at £1,000 total.
  • Voluntary filing even if under £1,000: You must file if you want to voluntarily pay Class 2 National Insurance contributions (NICs) to maintain entitlement to benefits like State Pension, preserve your self-employment record (e.g., for Maternity Allowance), claim Tax Free Childcare based on self-employment income, or reclaim CIS deductions as a subcontractor.
  • No need to file if under thresholds and no voluntary reasons: If total receipts ≤£1,000 (not from connected parties) and no voluntary NICs or other claims, check if a return is needed via www.gov.uk/check-if-you-need-a-tax-return. If not, notify HMRC by 31 January 2026 to avoid penalties.
  • Registration requirement: If you started self-employment between 6 April 2024 and 5 April 2025 and have not registered, do so immediately via www.gov.uk/register-for-self-assessment/self-employed. If you ceased before 6 April 2025, notify via www.gov.uk/stop-being-self-employed to correct NICs and avoid overpaying tax.
  • Special cases triggering liability:
    • Foster/Shared Lives carers: If qualifying care receipts exceed your qualifying amount (calculated via Helpsheet 236), you are liable; use simplified method or full calculation.
    • Rent-a-Room scheme: If gross receipts from furnished accommodation in your home ≤£7,500 (£3,750 if shared), no liability and no need to complete most boxes; if over, liable unless using the scheme (which caps relief at £7,500/£3,750, no expenses/capital allowances/trading allowance claimable).
    • Managing Serious Defaulters (MSD) programme: If in this during the year, liable and must use full pages.
    • Overseas business: If all business abroad and using remittance basis, limited boxes apply; if any UK business, full arising basis applies.

If none apply and you believe no return is needed, confirm via the checker tool.

Impact of Different Income Thresholds

Thresholds directly affect form choice, allowances, and tax rates (self-employment profits treated as non-savings income in tax calculation):

  • £1,000 (Trading Income Allowance): Exempt if ≤ this; over requires filing. Impacts: Cannot deduct expenses if claimed; no loss creation. For tax calculation, reduces taxable non-savings income.
  • £90,000 (Turnover Threshold for Short vs. Full Pages): If turnover <£90,000 (or would be if full year), use short pages. If ≥£90,000, or if accounting period not 12 months/ending in tax year, basis change with adjustment income, need to adjust Class 4 NICs profits, or in MSD, use full pages. Impacts: Full pages required for complex adjustments; short for simpler cases.
  • Tax Bands for Self-Employment Profits (Non-Savings Income): After deductions/allowances, profits are taxed in UK bands (assuming non-Scottish resident; Scottish rates differ but model assumes UK as PDFs focus on general):
    • First £37,700: 20% (basic rate).
    • Next £87,440: 40% (higher rate).
    • Over £125,140: 45% (additional rate).
    • Personal Allowance (£12,570 standard) reduces taxable income but tapers if adjusted net income >£100,000 (see Section 13 of tax calculation). No savings/dividend allowances apply as only self-employment considered.
    • If profits create losses, carry forward or set against other income (but model limits to self-employment only).
  • NICs Thresholds: Class 2 voluntary if profits <£6,725; mandatory if ≥£6,725 (flat rate). Class 4: 9% on profits £12,570-£50,270; 2% over £50,270. Impacts filing if voluntary.
  • Other Thresholds: £7,500 Rent-a-Room (as above). For tax calculation, if income >£100,000, Personal Allowance reduces by £1 for every £2 over (zero at £125,140). High Income Child Benefit Charge if >£50,000, but not applicable here as only self-employment.

Use cash basis (money in/out) unless opting for traditional accounting (accruals). If changing basis, transitional adjustment may apply.

Information to Put in Every Box (Self-Employment Pages)

Determine form: Use SA103S (Short) if turnover <£90,000 and no complex adjustments; SA103F (Full) otherwise. Print from gov.uk and enter name/UTR (10-digit number from HMRC letters) at top if not pre-printed. For tax calculation (SA110), enter self-employment profits as non-savings income in Section 1.

SA103S (Short Pages) Boxes
  • Box 1 (Description of business): Enter business type (e.g., “Plumber”, “Qualifying carer” for foster carers, “Rent-a-Room” if using scheme).
  • Box 4 (If you are a foster carer or shared lives carer): Put ‘X’ if applicable; if qualifying amount > receipts, put ‘0’ in Box 31 and stop; otherwise proceed.
  • Box 5 (If your business started after 5 April 2024, enter the start date): Enter DD MM YYYY (e.g., 15 05 2024).
  • Box 6 (If your business ceased before 6 April 2025, enter the final date of trading): Enter DD MM YYYY (not end-of-year date).
  • Box 7 (Date your books or accounts are made up to): Enter usual annual date (DD MM YYYY, e.g., 05 04 2025); must be after 31 March 2024 and before 6 April 2025, else use full pages.
  • Box 8 (Traditional accounting): Put ‘X’ if using accruals basis (not cash basis).
  • Box 9 (Your turnover): Enter total income received/earned before expenses (include cash/card/cheques, tips/commissions, payments in kind, money owed if traditional accounting, full CIS amounts if subcontractor). For Rent-a-Room over limit: gross receipts including services.
  • Box 10 (Any other business income): Enter trading income not in turnover (e.g., subletting business space, non-arm’s length reverse premiums, third-party trading income).
  • Box 10.1 (Trading income allowance): Enter up to £1,000 if claiming (against total receipts); cannot exceed receipts or create loss. Leave blank if deducting expenses instead.
  • Boxes 21, 28, 31 (For specific claims, e.g., Tax Free Childcare or simplified foster care): Enter as directed (e.g., Box 21: expenses if not claiming allowance; Box 28: capital allowances; Box 31: taxable profit/loss).
  • Box 36 (Voluntary Class 2 NICs): Put ‘X’ if paying voluntarily for benefits.
  • Box 38 (CIS deductions reclaim): Enter amount to reclaim if subcontractor.

For low-turnover cases (e.g., expect >£1,000 next year or voluntary NICs): Complete only Boxes 1-8 (and ‘X’ in 36 if applicable). For Rent-a-Room under limit: Only Box 1. Provisional: Only Boxes 1,5,9,10,21/22,28,31/32.

SA103F (Full Pages) Boxes
  • Box 1 (Business name): Enter full business name (unless your own name).
  • Box 2 (Description of business): Enter business type (e.g., “Qualifying carer” for foster carers, “Rent-a-Room” if using scheme).
  • Box 6 (If your business started after 5 April 2024): Enter DD MM YYYY.
  • Box 7 (If your business ceased after 5 April 2024 but before 6 April 2025): Enter DD MM YYYY (not end-of-year).
  • Box 8 (Date your books or accounts start – the beginning of your accounting period): Enter DD MM YYYY (usually day after prior period end; or start date if new).
  • Box 9 (Date your books or accounts are made up to or the end of your accounting period): Enter DD MM YYYY (usual annual date; or cease/start date if applicable).
  • Box 10 (Traditional accounting): Put ‘X’ if using accruals (not cash basis).
  • Box 13 (Foster carer flag): Put ‘X’ if qualifying carer; if amount > receipts, put ‘0’ in Box 76 and stop.
  • Box 14 (Other details, if applicable): Enter if MSD or similar.
  • Box 15 (Total receipts/turnover): Enter total income before expenses (similar to short Box 9; for foster carers: total receipts).
  • Box 16 (Other business income): Enter as short Box 10.
  • Box 16.1 (Trading income allowance): Enter up to £1,000 if claiming.
  • Box 30 (Rent-a-Room relief if over limit): Enter £7,500 (£3,750 if shared).
  • Box 31 (Qualifying amount for foster carers): Enter if using simplified method.
  • Box 47/48, 64/65 (Profit/loss): Enter net after expenses/allowances.
  • Box 59 (Balancing charges): Enter if applicable (e.g., Rent-a-Room).
  • Box 60 (Goods and services for own use): Enter value.
  • Box 68 (Adjustments, e.g., for basis period): Enter if period not standard.
  • Box 73 (Taxable profit): Enter final.
  • Box 76 (Taxable profit or loss): Enter ‘0’ if no profit; for overseas: limited.
  • Box 101 (Class 4 NICs adjustments): Enter if needed.

For multiple accounts: Repeat for each, consolidate recent. Provisional: Only Boxes 1-16, 47/48, 64/65, 73, 76/77 (plus 73.3/73.4/74 if applicable). For Rent-a-Room under limit: Only Boxes 1-2; over: Boxes 1-10,15,30,59.

Tax Calculation Summary (SA110) Working Sheet

Enter self-employment taxable profits (from short Box 31 or full Box 76) as non-savings income in Section 1. Complete sections sequentially:

  • Section 1: Add profits here (non-savings/lump sums).
  • Section 4: Deduct allowances (e.g., Personal Allowance via Section 13 if >£100,000 income).
  • Section 5: Taxable income = profits minus allowances.
  • Section 6: Allocate to bands (e.g., first £37,700 at 20%).
  • Section 7: Calculate tax due.
  • Section 15: Add Class 2/4 NICs (thresholds as above).
  • Other sections: Skip if no savings/dividends/gains/etc.

If transition profits from 2023-24 basis reform: Calculate twice (with/without in Section 1) for separate charge.

Checklist of Documents, Evidences, Receipts, Invoices, and Forms Needed to Submit a Tax Return Correctly

Do not submit any documents with your return unless HMRC asks; keep for records (at least 22 months after tax year end, or longer if enquiry). Checklist for preparation/submission:

  • Records of income/expenses: Receipts/invoices for all turnover (e.g., sales invoices, bank statements for cash/card payments), other income, balancing charges, goods for own use.
  • Expense evidences: Invoices/receipts for allowable expenses (e.g., costs deducted if not claiming trading allowance).
  • Accounts/books: Prepared accounts (cash or traditional basis) showing profit/loss calculation; if provisional, note reasons.
  • CIS statements: If subcontractor, forms showing deductions to reclaim.
  • Helpsheets: HS236 (foster carers), HS222 (profits calculation), HS223/HS229 (Rent-a-Room/other).
  • UTR confirmation: Letters/emails from HMRC with your 10-digit UTR.
  • Registration proof: If new, confirmation from www.gov.uk/register-for-self-assessment.
  • NICs evidence: If voluntary Class 2, records supporting benefit entitlement (e.g., State Pension gaps).
  • Forms to submit: Completed SA100 (main return) + SA103S or SA103F + SA110 (if calculating yourself). No attachments required for submission.

A numerical example of how self-assessment liability is calculated

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Here’s a numerical example showing how HMRC calculates your expected liability under Self Assessment

 Example: Calculating Expected Liability

Background

  • Your total tax and Class 4 National Insurance liability for 2023/24 (after PAYE and other credits) = £12,000.
  • You are self-employed and still trading in 2024/25, so HMRC assumes your next year’s liability will be roughly the same.

Step 1 – Work out the payments on account

Expected liability for 2024/25 is based on 100% of the previous year’s liability, split into two instalments:

[£12,000 × 50% = £6,000 \text{ per instalment}]

  • 1st Payment on Account (POA) – due 31 January 2025 = £6,000
  • 2nd Payment on Account (POA) – due 31 July 2025 = £6,000

You will therefore have paid £12,000 on account by 31 July 2025.

Step 2 – File the 2024/25 tax return

Suppose your actual tax liability for 2024/25 turns out to be £13,500.

Step 3 – Work out the balancing payment

[Actual liability (£13,500)} − \text{Payments on account (£12,000)} = £1,500]

That £1,500 is your balancing payment, due 31 January 2026.

Step 4 – Calculate next year’s payments on account

HMRC will now base your 2025/26 expected liability on this latest figure (£13,500), unless you claim to reduce it.

[£13,500 × 50% = £6,750 \text{ per instalment}]

So your next two payments on account will each be £6,750, due 31 January 2026 and 31 July 2026.

Step 5 – If your income drops

If you know your 2025/26 profits will be lower, you can apply to reduce your payments on account.
For example, if you expect your liability to fall to £10,000, you can claim to reduce each POA to:

[£10,000 × 50% = £5,000]

 If you reduce too much and end up owing more, HMRC will charge interest on the shortfall.