UK Basis Period Reform 2026/27: What Self-Employed Need to Know

The UK has fundamentally changed how self-employed people calculate their taxable income. Basis Period Reform transitioned all unincorporated businesses (sole traders + partnerships) from the old "current year basis" to the new "tax year basis" in 2024/25, with full effect from 2025/26 onwards. This guide covers what changed, the transitional rules, and what self-employed people need to know for 2026/27.

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What changed

Before April 2024:

Sole traders and partnerships used the current year basis.
Tax was based on the accounting period ending in the tax year (e.g. 30 June 2023 accounts taxed in 2023/24).
Many businesses kept a non-31-March year-end (e.g. 30 June, 30 September) for cashflow reasons.
"Overlap profits" were carried forward and relieved on cessation.

From April 2024 (full effect 2025/26):

All unincorporated businesses use the tax year basis.
Tax is based on profits earned between 6 April and 5 April each year, regardless of accounting period dates.
Non-31-March year-ends are tolerated but require apportionment.
"Overlap relief" was used up during the 2023/24 transition year.

Why the change

HMRC's stated reasons:

Simpler matching between tax years and the actual income earned in them.
Better data alignment with PAYE / RTI feeds for cross-checking.
Easier digitalisation as Making Tax Digital (MTD) for Income Tax rolled out from 2026.
Faster tax collection - the old system effectively let many businesses defer tax by 9 months relative to the tax year.

The reform was widely opposed by accountancy bodies (ICAEW, ACCA, CIOT) on complexity and cashflow grounds - but was implemented anyway via Finance Act 2022.

How to calculate under tax year basis

If your accounting year ends 31 March or 5 April, no calculation change is needed - your accounting year and tax year are aligned.

If your accounting year ends at any other date, you must:

Take the profit from your accounting period that ends within the tax year.
Apportion the next accounting period's profit for the days that fall within the same tax year.
Add them together.

Worked example: accounting year ends 30 September 2026.

Profits 1 October 2025 to 30 September 2026: £60,000.
Next year profits (1 October 2026 to 30 September 2027): £80,000.
Days in 2026/27 from 6 October 2026 to 5 April 2027 = 182 days.
Apportioned: £80,000 × (182/365) = £39,890.

Profits taxed in 2026/27:
  Sept 2026 year end:                £60,000
  Apportioned next-year:             £39,890
  Total:                             £99,890

This is materially more complex than the old system (which would have just taxed the £60,000).

Transitional rules - the 5-year spreading

When the reform took effect in 2023/24, businesses with non-31-March year-ends faced a one-off transitional adjustment - typically additional taxable profit equivalent to up to 11 months of additional income.

To soften the cashflow impact, HMRC allowed the additional profit to be spread over 5 years:

20% taxed in 2023/24.
20% taxed in 2024/25.
20% taxed in 2025/26.
20% taxed in 2026/27.
20% taxed in 2027/28.

Once spread, the additional profit can't be revisited or accelerated. The 2026/27 instalment is automatic if you elected for spreading.

Overlap relief

Under the old current-year basis, overlap profits accrued when your accounting year-end didn't align with the tax year. These overlap profits were relieved during the 2023/24 transition (or on cessation if earlier).

Most businesses had small overlap relief amounts (£5,000-£20,000). Some long-standing partnerships had substantial amounts (£50,000+).

If you didn't claim overlap relief during the 2023/24 transition, HMRC may still allow late claims for some cases. Talk to your accountant if you suspect you missed this.

What stays the same

Class 2 + Class 4 NI rules unchanged.
Self Assessment registration unchanged.
31 January / 31 July payment dates unchanged.
Annual Allowance, ISA limits, etc. unchanged.
Allowable business expenses unchanged.
Trading allowance (£1,000 for low-income self-employment) unchanged.

What changes for partnerships

Partnerships face the same transition, but with additional complexity:

Each partner's individual basis period may differ if they joined or left mid-year.
Partnership accounting period changes affect all partners' tax positions.
Partnership profit shares are still allocated by the partnership agreement, but tax periods are now individual.

For partnerships with non-31-March year-ends, the transition was particularly burdensome and many opted to align their accounting year to tax year going forward.

What changes for traders considering year-end change

Many sole traders are now considering changing their accounting year to align with the tax year (i.e., move year-end to 31 March or 5 April). Reasons:

Eliminates apportionment complexity going forward.
Simplifies MTD compliance (digital records aligned with tax year).
Better matches reporting to public reference points.

The downside: a year-end change creates a one-off "long" or "short" period that may have cashflow implications. Talk to your accountant about timing.

Making Tax Digital (MTD) for Income Tax

From April 2026, MTD for Income Tax becomes mandatory for sole traders and landlords with annual income above £50,000. From April 2027, the threshold drops to £30,000. Below that, MTD is voluntary.

MTD requires:

Digital record-keeping through approved software (Xero, QuickBooks, FreeAgent, Sage, etc.).
Quarterly submissions to HMRC throughout the year.
Final declaration by 31 January following the tax year end.

The basis period reform was deliberately timed to enable cleaner MTD adoption. The two reforms together mean modern UK self-employment compliance requires substantial software + workflow investment.

What to do now

Verify your 2024/25 + 2025/26 tax returns correctly applied basis period reform.
Check overlap relief was claimed correctly during the 2023/24 transition.
Decide on year-end alignment if your accounting year still differs from tax year.
Adopt MTD-compliant software if you'll be MTD-mandated from April 2026 (income above £50,000).
Coordinate with your accountant for the 2026/27 transitional spread instalment.

When to talk to a specialist

For routine cases (single sole-trader business, simple year-end), DIY compliance is manageable. A specialist accountant earns their fee when:

You have partnership complications with mid-year joiners/leavers.
You missed overlap relief in 2023/24 and need to recover it.
You're considering year-end alignment mid-stream.
You're approaching MTD mandation (income above £50,000 from April 2026).
You have multiple unincorporated businesses with different accounting periods.

The Chartered Institute of Taxation (CIOT) lists specialist advisers at ciot.org.uk.

Disclaimer

PayslipIQ provides automated educational guidance based on the figures you supply. It is not regulated tax advice. Basis period reform mechanics are technical and individual circumstances vary substantially - for substantial transitional issues or MTD readiness, use a CTA-qualified or ICAEW/ACCA-registered accountant.