CAT / FIA FTX Syllabus B. Adjusted Profit / Loss Computations - Basis of assessment for self employment income - Notes ^{1 / 3}

The basis of assessment for self-employment income

A tax year runs from 6 April to 5 April.


The current tax year 2024/25 runs from 6 April 2024 to 5 April 2025.

Profits are taxed on a tax year basis. This means that trading profits from the 06/04/24 until 05/04/25 will be taxed in the tax year 2024/25.

Trading profits will have to be time apportioned if accounts are not made up to 5 April (or 31 March).

Example:

Anaya makes up her accounts to 30 June each year. Her trading profits are:

For the tax year 2024-25, Anaya will be assessed on profits for the period 6 April 2024 to 5 April 2025. The assessment is therefore £67,550 ((61,700 x 3/12) + (69,500 x 9/12)).

Transition profits

The previous tax year (2023/24) was the transitional year from the old basis of assessment to the tax year basis.

A sole trader or partner who did not prepare accounts to 5 April (or 31 March) might have had higher profits for 2023/24 compared to if the old basis had continued to apply. In these circumstances, the sole trader or partner was only assessed on the lower profits calculated under the old basis. 

The excess profits, called the transition profits, are taxed by spreading them over a period of five years starting with the tax year 2023/24. For example, the transitional assessment for the tax year 2023/24 was £110,000, but the assessment would have only been £60,000 if the old basis had continued to apply. The transition profits are £50,000, with £10,000 (50,000/5) assessed for each of the tax years 2023/24 to 2027/28. 

NOTE: You are not expected to calculate transition profits, but you do need to know how a given amount of transition profit is subject to tax during any of the tax years 2024/25 to 2027/28. 

Transition profits are included in the income tax computation of a sole trader or partner as a separate entry. They can impact on the availability of the personal allowance.