Self Assessment: the difference between accounting periods and basis periods
This article describes the differences between an accounting period and a basis period.
Your accounting period is a time period that you choose to run your accounts to (often a year).
Your basis period is the time period that HMRC uses for tax.
Accounting periods
Every business has to prepare its accounts for a year at a time because you pay tax on a year’s worth of profit at a time. You’ll choose a date to prepare your accounts to, each year.
This is called your accounting year end date, year end date or year end. The period that runs to a year end date is called your business’s accounting year if it’s a full year, or accounting period (which can be a year or a different span of time).
Many sole traders choose either 31st March or 5th April for their year end, because the tax year finishes each year on 5th April, and HMRC have said that accounts prepared to 31st March also count as being prepared for a tax year at a time (This also covers accounts which are prepared to any of 1st, 2nd, 3rd or 4th April).
Basis periods
You pay tax on the profits for your basis period for the tax year. You may have to apportion your profits or losses if your accounting period does not coincide with the basis period. From the 2024/25 tax year, sole traders will be required to include profits on their tax returns for the tax year, rather than their accounting year, in accordance with the basis period reform rules. There is a transition year in 2023/24.
Up to 5 April 2023
Your basis period was nearly always the same as your accounting period, and if your accounting year end was the same as the tax year end, your basis period would always match your accounting period, until your business ends.
For example, if your year end is 31st December, then for the tax year 6th April 2021 - 5th April 2022, you would pay tax on the profit you made in the calendar year 2021, because your accounting year end date that fell between 6th April 2021 and 5th April 2022 was 31st December 2021.
2023 to 2024 transition year
The 2023 to 2024 tax year is known as the ‘transition year’. In your Self Assessment tax return, you will need to report profit from the day after the end of the basis period you paid tax on for 2022/23 (usually your accounting year end) up to 5 April 2024.
This means you:
- will report profits covering more than one accounting year
- may need to apportion 2 sets of accounts to estimate your profits for the year
For example, if you have an accounting year end date of 31 December 2022, you will report overall profit from 1 January 2023 to 5 April 2024 in the 2023 to 2024 tax year.
If you report profit covering more than 12 months, the excess is known as ‘transition profit’. This can be reduced by Overlap Relief from your early years of trade, and any remaining transition profit can be spread over the following 5 years, up to the tax year 2027 to 2028, so that you’re not taxed on it all at once. If you’re not sure about what overlap relief you might be entitled to, please check HMRC’s guidance.
From 6 April 2024
You need to report the profits you earned during the tax year the return relates to (6 April to the following 5 April). If you have an accounting year end date that is between 31 March and 5 April, put the figures from these accounts in your return as you have always done.
If your accounting year end does not fall between those dates, you need to report parts of the profit from 2 sets of accounts. This means adding together profit from:
- 6 April up to your business accounting year end date
- the start of your new business accounting year to 5 April the following year
For example, if you have an accounting year end date of 31 December, you will report profit from both:
- 6 April 2024 to 31 December 2024
- 1 January 2025 to 5 April 2025
The normal method of apportioning profits is by looking at the number of days in each of the periods in the tax year.