If you’re self-employed in the UK and don’t use a 31 March to 5 April accounting year, you need to know about overlap profits.

You also need to know about overlap relief and the Basis Period Reform that HMRC is seeing through. We’ll explain everything in this guide.

Pre-pandemic the self-employed accounted for 15% of UK workers, according to ONS data but as of 2022, this had fallen to 13% – approximately 4.2m people.

But that’s still a lot of people filing a self assessment form every year and many of them must take overlap profits into account.

Let’s look at this in order, starting with Basis Period Reform and what it means for the UK’s self-employed workers.

What is Basis Period Reform?

At the time of writing in April 2024, if the following applies to you, prepare to make adjustments due to the UK government’s Basis Period Reform policy:

  1. You’re self-employed or working in a trading partnership
  2. Your business accounting year end does not match the tax year, i.e. it’s not between these dates: 31 March to 5 April

In other words, if your accounting year end matches that of the UK tax year, you don’t need to make any changes. You’re already compliant with the new Basis Period Reform.

But those with different accounting year dates, such as 1 January to 31 December for example, need to change how they complete their self assessment tax returns. The change applies for the tax year 2023/24 onwards.

The government wants to bring all self assessment profit reporting periods in line with its own tax year for consistency.

What are overlap profits?

If at any point (including the time before Basis Period Reform) you end up paying tax on the same profit twice in consecutive tax years, this is called overlap profits. There is relief for this, we’ll cover how to get it in the next section.

This scenario tends to arise when a business changes its accounting dates. Often, businesses take the date they began trading as the start of their accounting period – let’s say July, for example – then change it at a later date.

If you change your accounting period, there will be a few overlapping months between two years on a one-off basis. Since the UK tax year is set at 31 March to 5 April the following year, you report a few months of profit twice in consecutive years when changing your accounting period.

Now under Basis Period Reform, any UK self-employed or trading partnership business will have some overlap profits if their current accounting period isn’t already 31 March to 5 April.

The tax year 2023/24 is the transitional one, with affected businesses able to apply for overlap relief. Then from the tax year 2024/25, self assessments will need to report profit for the year using the dates 31 March to 5 April.

Here is an example:

  • If you have an accounting year end date of 31 December 2022, you need to report profit from 1 January 2023 to 5 April 2024 in the 2023/24 tax year
  • Then you will report profit from both 6 April 2024 to 5 April 2025 in the following tax year

Here’s what you need to do, as confirmed by HMRC guidance on changes to reporting income.

Step 1 – Get your overlap relief figure

Look for your overlap relief figure on a previous self assessment return.

You may have included the figure as trading income on self employment (SA103) or a partnership (SA104).

If you don’t have the information required, HMRC may be able to find it for you from the last tax return or recalculate it based on previous profit figures.

Step 2 – Work out your transition / overlap profit

Taking the tax year 2023/24 as an example, you need to work out the profit from two periods of time:

  • Standard part: This is the 12 months of your usual accounting period in 2022/23
  • Transition part: This begins after the standard part – i.e. the 12 months of your usual accounting period in 2022/23 – and ends on 5 April 2024

That means if your accounting period used to end on 31 December… Your standard part is from 1 January to 31 December 2023 and the transition one is for 1 January to 5 April 2024.

Step 3 – Include overlap profits and relief in your tax return

Include both the standard and transition / overlap profit in your self assessment. Then deduct your overlap relief from the overlap profit – for more details on working this out, here is a detailed government guide.

We hope you’ve found this guide useful – for other helpful guides, check out our blog.

In recent months we’ve covered the expat tax UK rules, if charities pay tax and whether there’s a side hustle tax in UK law.

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