HMRC Basis Periods Explained

HMRC basis periods were created to ensure that all self-employed individuals are taxed across the same 12 month period and stop sole traders reducing their tax bills by playing the rules. In this guide, I’ll explain more about basis periods and how sole traders can end up paying tax twice if they fall foul of the rules.

I’ve updated this post on 20 January 2021

What is the HMRC Basis Period?

Sole traders can normally include income and expenses for a 12 month period on their tax return. This 12 month period is known as an accounting period and if they choose dates that match the tax year, HMRC basis periods won’t apply. But if a sole trader chooses an accounting period that doesn’t match the tax year, then they will be affected by HMRC basis periods.,

To keep the system fair for everyone who is self-employed HMRC essentially ignores your accounting period and assesses everyone for tax based on the tax year. In other words, a basis period matches the UK tax year.

HMRC considers the year 1 April to 31 March to be the same as the tax year, to help make sole trader reporting easier.

What Happens When the Accounting Period Doesn’t Match the Basis Period?

If a sole trader chooses an accounting period that is different from the tax year, they can end up paying more tax due to overlap profits. Here’s a couple of examples to explain:

Example

You go self-employed on the 1 June 2018 choosing an accounting end date of 5 April each year. You’ll need to report income and expenses for the next 3 years for the following accounting dates on your tax return:

Tax YearAccounting Period
2018/20191 June 2018 to 5 April 2019
2019/20206 April 2019 to 5 April 2020
2020/20216 April 2020 to 5 April 2021
HMRC Basis Periods

The first period you report on in your self-assessment tax return is shorter than subsequent years which will all be 12 months long.

Example 2

You go self-employed on the 1 June 2018 choosing an accounting period end date of 31 May each year. You’ll need to report income and expenses for the next 3 years for the following accounting dates on your tax return:

Tax YearAccounting Period
2018/20191 June 2018 to 5 April 2019
2019/20201 June 2018 to 31 May 2019
2020/20211 June 2019 to 31 May 2020
HMRC Basis Periods

After the two years in business, your basis period becomes the 12-month period you have chosen for your accounts, 31 May. But you’ll notice that you will have declared and paid tax on your profits from 1 June 2018 to 5 April 2019. These are what as known as overlap profits meaning you have been taxed twice on your profits for and, although you’ll get relief for this tax by changing accounting periods or stopping self-employment, you’ll need to pay the tax upfront.

Overlap Profits and How to Claim Relief

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.