Basis period reform for taxing self-employed

Basis period tax reform for unincorporated businesses

From April 2024 the basis period tax reform for unincorporated businesses comes into effect. The basis period reform for taxing self-employed individuals means that all unincorporated businesses pay tax based on the financial tax year. These changes apply to sole traders and partnerships in the UK. The basis period is the financial period that a business uses to calculate profits and taxes.

What is basis period reform?

Before the basis period change, unincorporated businesses reported their profit and tax based on their chosen accounting period. From April 2024, the financial tax year (6th of April to 5th of April) becomes the standard basis reporting period.

This means that regardless of the business accounting year, all unincorporated businesses must use the standard basis period. Self-employed individuals will pay tax based on their taxable income for the financial tax year from 6th April to 5th April. Or April to the end of March of the following year.

Apportion profits

An unincorporated business with an accounting year end date falling outside of the basis period must apportion its profits. Under Basis period reform, business profits are time apportioned. For example, for the tax year 2024/25 a business with an accounting year ending 31 July, will be taxed on 117/365 of profits to the end of July 2024 plus 248/365 of the profits for the year to 31 July 2025. This is illustrated in the table below.

Embarking on a new venture

If you are embarking on a new venture, it makes sense to align your business accounting year with the tax year. This keeps things simple and avoids the additional administrative burden of apportioning profits.

For more information about basis period reform for taxing self-employed individuals check out the HMRC link below:

Basis period reform – GOV.UK (www.gov.uk)