How FreeAgent apportions income and expenses for sole traders under MTD for Income Tax

This article explains how FreeAgent apportions income and expenses under Making Tax Digital (MTD) for Income Tax when your accounting year is different from the period that you submit quarterly updates for.

You can choose to use tax year quarters or calendar year quarters for submitting your quarterly updates to HMRC.

If the tax year overlaps with two or more accounting years and the end date of the last accounting year hasn't passed when you send your end-of-year update, you need to submit provisional figures to HMRC on your end-of-year update. FreeAgent will automatically calculate provisional figures for your end-of-year update when the tax year overlaps two or more accounting years.

You’ll then need to submit finalised figures once the second accounting year that overlaps the tax year has ended when you send a final declaration.

An introduction to basis period reform for sole traders

From the 2024/25 tax year, sole traders are 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.

If your business’s accounts are not prepared up to the end of the tax year (5th April, or by concession 31st March or any of the first four days in April), HMRC requires the income and expenses from two accounting years to be apportioned in order to calculate accurate figures for a single tax year. FreeAgent calculates this for customers with a UK sole trader account type.

Apportioning profits

If your accounting year doesn't align exactly with the tax year (ending 5th April, or by concession 31st March or any of the first four days in April), you need to apportion your profits between the two accounting periods overlapping the tax year.

FreeAgent automatically calculates this for sole trader accounts by:

1. Identifying the two overlapping accounting periods:

• The first accounting period that partly falls within the tax year.
• The second accounting period that partly falls within the tax year.

2. Calculating apportioned profits:

• Multiplying the profit from each accounting period by the number of days falling within the tax year.
• Dividing by the total number of days in each respective accounting year.

For example, in the 2025/26 tax year, a business with a December 31st year end will pay tax on:

• The proportion of profits from 6th April 2025 to 31st December 2025 (270 days), divided by the total days of the 2025 accounting year (365 days).

If your profit for the year ending 31st December 2025 was £30,000, the apportioned profit for the first part (6th Apr 2025 - 31st Dec 2025) would be £22,191.78 (£30,000 × 270 ÷ 365).

• The proportion of profits from 1st January 2026 to 5th April 2026 (95 days), divided by the total days of the 2026 accounting year (365 days).

If your profit for the year ending 5th April 2026 was £24,000, the apportioned profit for the first part (1st Jan 2026 - 5th April 2026) would be £6,246.58 (£24,000 x 95 ÷ 365).

3. Combining apportioned figures

FreeAgent adds these two apportioned amounts together and then subtracts the amount submitted in the quarterly updates to calculate the basis adjustment on the Annual summary page. In this example, the basis adjustment for the 2025/26 tax year would be £21,041.10 (£22,198.78 + £6,246.58 - 7,404.26).

FreeAgent will then add the adjustment figure to the net profit on the Self-employment page to calculate the total taxable profit.

Submitting provisional figures to HMRC

If the tax year overlaps with two accounting years and the end date of the second accounting year hasn't passed when you send your end-of-year update, you need to submit provisional full-year estimated figures to HMRC.

These figures are estimates and must be submitted by the tax return filing deadline of 31st January.

First, FreeAgent will check that your accounting year-end date doesn’t match the end of the tax year (5th April, or by concession 31st March or any of the first four days in April). If the end date of the following accounting year hasn't passed when you attempt to file the tax return, FreeAgent will notify you that you need to use provisional figures.

For example, if your accounting year runs from 1st January to 31st December and the second accounting year begins on 1st January 2026, the end date of the accounting period (31st December 2026) won’t have passed if you send your end-of-year update for the 2025/26 tax year on 30th September 2026.

FreeAgent will send these provisional figures to HMRC when you send the end-of-year update.

The status for the end-of-year update will show as ‘Provisionally filed’.

When the accounting year ends and the latter accounting figures have been finalised, you’ll need to send another submission to HMRC with finalised figures.

How FreeAgent calculates provisional figures

Until the end of the last accounting period, FreeAgent uses the figures from the quarterly updates and submits these to HMRC without any basis adjustment. After the end of the period, FreeAgent submits the figures from the quarterly updates to HMRC with the basis adjustment included.

Submitting finalised figures to HMRC

Once the second accounting year that overlaps the tax year has ended, you can send your final declaration to submit finalised figures to HMRC. The finalised figures must be submitted within 12 months after the tax return filing deadline of 31st January.

If you previously filed a final declaration containing provisional figures, you’ll need to submit an amended final declaration containing finalised figures.

To do this, you need to unlock the tax year by selecting ‘Unlock Tax Year’ in the top-right of the MTD for Income Tax area.

You’ll then see the option to select ‘Send Amended Final Declaration’ to submit your finalised figures to HMRC.