Basis Period Reform and MTD

Basis Period Reform: How the Tax Year Basis Affects MTD Reporting

Last updated: February 2026

From the 2024/25 tax year onwards, all sole traders in the UK are taxed on profits arising in the tax year itself (6 April to 5 April). This tax year basis replaced the previous system where businesses could be taxed on profits from their own chosen accounting period. The change, known as basis period reform, has direct consequences for Making Tax Digital for Income Tax Self Assessment (MTD ITSA). If your business has used a non-standard year-end such as 31 December, you need to understand how the transition works, what happened to your overlap relief, and why aligning your accounting period to the tax year simplifies MTD quarterly reporting.

What was the old basis period system?

Before April 2024, sole traders could choose any accounting year-end. A business using a 31 December year-end would be taxed on profits for the 12 months ending 31 December within the tax year. This created a mismatch between the tax year (April to April) and the accounting period.

When a business first started, the opening year rules often resulted in the same profits being taxed twice. HMRC tracked this double taxation as overlap profits, to be relieved later when the business ceased or changed its accounting date.

In practice, many sole traders never received their overlap relief because they continued trading indefinitely with the same year-end. HMRC acknowledged that many taxpayers did not even know their overlap figure.

The shift to tax year basis from 2024/25

Basis period reform, legislated in the Finance Act 2022, moved all unincorporated businesses to the tax year basis from 6 April 2024. From the 2024/25 tax year onwards, sole traders are taxed on profits arising between 6 April and 5 April (or 31 March, which HMRC treats as equivalent), regardless of their accounting year-end.

If you already use a 31 March or 5 April year-end, the change has no practical effect. Your accounting period already aligns with the tax year. However, if you use any other year-end, the tax year basis means you must now apportion your accounting profits to fit the tax year.

For example, a sole trader with a 31 December 2024 year-end would apportion profits as follows for 2024/25:

• 9/12 of the profits from the year ended 31 December 2024 (covering 6 April to 31 December 2024)
• 3/12 of the profits from the year ended 31 December 2025 (covering 1 January to 5 April 2025)

This apportionment must happen every year for as long as the business retains a non-standard year-end.

The transition year: 2023/24

The 2023/24 tax year (6 April 2023 to 5 April 2024) was the transition year. During this year, businesses moving from the old rules to the new tax year basis were taxed on a longer-than-usual period of profits. The transition year caught up any gap between the old basis period and the new tax year basis.

For a sole trader with a 31 December year-end:

• Standard profits: year ended 31 December 2023 (the normal 12 months under old rules)
• Transition profits: 1 January 2024 to 5 April 2024 (approximately 3 months of additional profits)

These transition profits were reduced by any available overlap relief. If a taxpayer had £15,000 of overlap profits from when they started trading, those were deducted from the transition profits. Any remaining transition profits after overlap relief can be spread over five tax years (2023/24 to 2027/28) to ease the tax burden, or the taxpayer can elect to be taxed on more in an earlier year.

Why this matters for MTD quarterly reporting

MTD ITSA requires sole traders and landlords with qualifying income above £50,000 to submit quarterly updates to HMRC from 6 April 2026. The quarterly periods follow the tax year:

Qualifying income is the total of gross self-employment income plus gross UK property income. It is based on turnover, not profit.

These quarterly periods are fixed to the tax year. They do not follow your accounting year-end. Under the old basis period rules, a 31 December year-end business would have had its profits assessed on a calendar year. Under MTD, the quarterly updates always run April to April. Basis period reform ensures that the profits you report in your tax return match the same April-to-April period as your MTD quarterly updates.

Without basis period reform, a sole trader with a 31 December year-end would have submitted quarterly updates on an April-to-April cycle while being taxed on a January-to-December cycle. The reform eliminates that mismatch.

Should you change your accounting year-end?

You are not required to change your accounting year-end. The tax year basis works through apportionment, so a 31 December year-end business can continue producing accounts to 31 December and apportion profits to the tax year. However, HMRC has recommended that businesses consider aligning their accounting period to 31 March or 5 April.

The practical advantages of aligning are significant:

• No apportionment needed. If your accounting year matches the tax year, the profits in your accounts are the profits in your tax return. No splitting, no estimation.
• Simpler quarterly updates. Your MTD quarterly updates directly correspond to periods within your single set of accounts. Your Q1 update (6 April to 5 July) sits neatly within your April-to-March accounting year.
• Easier software setup. MTD-compatible software is designed around the tax year quarters. Running your accounts on the same cycle means your bookkeeping periods, your quarterly summaries, and your annual accounts all align without manual adjustment.
• Reduced accountancy costs. Your accountant does not need to perform profit apportionment calculations or reconcile two overlapping periods.

The main reason to keep a non-standard year-end is if it aligns with your business cycle. But for most sole traders, the administrative simplicity of aligning to 31 March or 5 April outweighs any benefit of a non-standard date.

Worked example: transitioning a 31 December year-end to the tax year basis

Sarah is a freelance graphic designer in Manchester. She has used a 31 December accounting year-end since she started trading in 2015. Her gross self-employment income is £68,000 per year and she has no property income. She entered the transition year 2023/24 with £12,000 of overlap profits from her opening years.

Transition year (2023/24)

Sarah’s taxable profits for 2023/24 were calculated as:

• Standard profits: year ended 31 December 2023 = £42,000
• Transition profits: 1 January 2024 to 5 April 2024 = £10,500 (3/12 × £42,000, assuming even profits)
• Less overlap relief: −£12,000
• Net transition profits: −£1,500 (negative, so no additional tax from transition)

Sarah’s overlap relief exceeded her transition profits, so the transition year did not increase her tax bill. Taxpayers with low or no overlap profits, or those whose profits have grown significantly since they started trading, may not be as fortunate.

2024/25 onwards (tax year basis)

Sarah keeps her 31 December year-end. For 2024/25, her taxable profits are:

• 9/12 of the year ended 31 December 2024 (Apr – Dec 2024): £33,000
• 3/12 of the year ended 31 December 2025 (Jan – Mar 2025): £11,500
• Total taxable for 2024/25: £44,500

Under MTD from 6 April 2026

Sarah’s qualifying income exceeds £50,000, so she enters MTD under Phase 1. Her quarterly updates for 2026/27 cover:

These quarterly periods do not align with her 31 December year-end. Her accounting software generates quarterly summaries for the MTD tax year periods regardless of her accounting year-end. At the Final Declaration (due 31 January 2028), her accountant will need to apportion profits from her December 2026 and December 2027 accounts to fit the 2026/27 tax year. If Sarah changed her year-end to 31 March, this apportionment would be unnecessary.

Sarah decides to align

After discussing the options with her accountant, Sarah decides to change her accounting year-end to 31 March 2026. She prepares a set of accounts for the 15-month period from 1 January 2025 to 31 March 2026. From 2026/27 onwards, her accounting year, her tax year, and her MTD quarterly periods all align. Her quarterly updates feed directly into her annual accounts with no apportionment required.

Overlap relief and the MTD threshold

All remaining overlap relief was used in the 2023/24 transition year. If your overlap profits exceeded your transition profits, the transition year may have produced a loss or reduced profit. If they fell short, the excess transition profits can be spread over five tax years (2023/24 to 2027/28). From 2024/25 onwards, overlap relief no longer exists. If you did not claim it in your 2023/24 return, speak to your accountant urgently as the relief cannot be carried forward.

Importantly, the qualifying income threshold for MTD is based on gross income (turnover), not taxable profits after basis period adjustments. If your gross self-employment income exceeds £50,000, you are in MTD from 6 April 2026 under Phase 1, regardless of your accounting year-end or any transitional adjustments. The later phases lower the threshold to above £30,000 from 6 April 2027 and £20,000 or more from 6 April 2028.

Frequently asked questions

Do I have to change my accounting year-end because of basis period reform?

No. You can keep any year-end you choose. The tax year basis works through apportionment, so your profits are split across tax years as needed. However, aligning to 31 March or 5 April simplifies your tax return, your MTD quarterly reporting, and your overall record-keeping.

What happens to my overlap relief?

All remaining overlap relief was used in the 2023/24 transition year. It was deducted from your transition profits. From 2024/25 onwards, overlap relief no longer exists. If you had overlap profits and did not claim them in your 2023/24 tax return, speak to your accountant urgently as the relief must be claimed in that year.

How does basis period reform affect my MTD quarterly updates?

MTD quarterly updates always follow the tax year (6 April to 5 April), split into four quarters. Basis period reform means your taxable profits also follow the tax year. The two systems are now aligned. If you keep a non-standard year-end, your software still records transactions throughout the year and generates quarterly summaries for the correct MTD periods.

Can I spread my transition profits?

Yes. If your 2023/24 transition profits (after overlap relief) are positive, you can spread them equally over five tax years from 2023/24 to 2027/28. You can also elect to accelerate the spread by recognising more in an earlier year, which might be beneficial if your income is lower in that year.

Does basis period reform affect landlords?

Landlords with UK property income are already taxed on a tax year basis, so basis period reform has no direct effect on property income. The reform applies to self-employment income from sole trades and partnerships. However, if you have both self-employment and property income, the combined qualifying income determines your MTD obligations. See our MTD Income Tax guide for full details.

Sources

• GOV.UK: Basis period reform
• GOV.UK: Making Tax Digital for Income Tax
• GOV.UK: Get help with basis period reform
• Finance Act 2022