What are transition profits from basis period reform?

Transition profit is the extra profit taxed when sole traders and partners with a year end outside 31 March to 5 April moved to the tax year basis in 2023-24. It is spread over 5 tax years, ending in 2027-28.

Before the change, a trade was taxed on the accounts that ended in the tax year. From 2024-25, every sole trader and trading partner is taxed on the profit made in the tax year itself, 6 April to 5 April, whatever date their accounts run to. The rules are in Schedule 1 to the Finance Act 2022, and the figures below follow HMRC's Business Income Manual and helpsheets as checked on 17 October 2026.

Who has transition profit

You may have transition profit if you were self-employed or in a trading partnership in 2023-24 and your accounting year did not end on or between 31 March and 5 April. In 2021 HMRC estimated there were 528,000 sole traders and partners in that position.

For 2023-24, the transition year, your return had to cover everything from the day after your 2022-23 accounting date up to 5 April 2024. For a builder with a 30 April year end, that was 1 May 2022 to 5 April 2024: a normal 12 months, called the standard part, plus 341 more days, called the transition part.

In most cases, the profit of the transition part, less any overlap relief, is your transition profit. Overlap relief is profit that was taxed twice under the old rules, usually in your early years. It could only be used in 2023-24, and anything unused then is gone.

How the spreading works

The law spreads transition profit over five tax years without you having to ask. 20% is taxed in each of the first four years, and the balance in the fifth.

Three rules matter for the slices still to come:

• You can speed it up. You can elect to have more taxed in a year, and the later slices shrink to match. The election must be made within 12 months of that year's 31 January filing date, so by 31 January 2028 for 2025-26 and 31 January 2029 for 2026-27.
• Stopping trading brings it all in. If you stop before it has all been taxed, the whole balance is taxed in the tax year you stop.
• It is taxed, but kept out of your net income. The tax on it is worked out as if it were part of your income, including any personal allowance you would lose over £100,000. It still counts for Class 4 National Insurance, but not towards the Making Tax Digital income threshold.

Worked example: a builder with a 30 April year end

These figures are made up to show the method.

• Accounts to 30 April 2023 show a profit of £40,000. That is the standard part, taxed in full in 2023-24.
• Accounts to 30 April 2024 show a profit of £36,600. The transition part, 1 May 2023 to 5 April 2024, is 341 of that year's 366 days: £36,600 × 341 ÷ 366 = £34,100.
• Overlap relief from the early years is £9,100, so the transition profit is £34,100 − £9,100 = £25,000.
• 20% is £5,000, taxed on top of the normal profit in each year from 2023-24 to 2027-28.

For 2026-27, the builder's normal profit comes from two sets of accounts, split by days:

The 2026-27 return shows £43,300 of profit plus the £5,000 transition slice. If the builder stopped trading during 2026-27, the remaining £10,000 would all be taxed that year instead.

What this means for you

If your year end is not between 31 March and 5 April, the 2025-26 slice goes on the return due by 31 January 2027, and two more follow, for 2026-27 and 2027-28. Each goes on that year's return as its own figure, not mixed into your profit. On the 2025-26 full self-employment pages (SA103F) it is box 73.3; box numbers can change between years. HMRC's notes say you must use the full pages if your accounts end before 31 March or after 5 April.

Splitting profit across two sets of accounts carries on every year, even after the spreading ends. Your 2026-27 figures need accounts to 30 April 2027, which may not be finished in time for the 31 January 2028 deadline. If not, you give provisional figures and amend the return later. GOV.UK says moving your year end to 31 March or 5 April can make returns simpler.

In Making Tax Digital (MTD), quarterly updates follow the tax year. Calendar quarters are for accounts that run 1 April to 31 March. For a year end outside 31 March to 5 April, GOV.UK says you will make extra adjustments in your software after the 2026-27 tax year ends, with more guidance to come. Quarterly updates are totals of income and expenses, so transition profit is not in them. HMRC's MTD tax calculation shows it separately, with any extra you choose to bring in.

Steps to take for the remaining slices

1. Find your transition profit on your 2023-24 return and note how much has been taxed so far.
2. Work out this year's slice. It is 20% of the original figure unless you sped it up in an earlier year.
3. Decide whether to bring more into this year, and if so make the election by the deadline.
4. Split your profit to the tax year by days, or another reasonable method you use every year.
5. Enter the slice separately on your return, and put details of any election in the "Any other information" box.
6. If you are stopping trading, include the whole balance in the year you stop.

The free MTD check shows when Making Tax Digital starts for you, and the trades section has more guides on running a trade.