Taxation (UK) · Income from self-employment

Basis of Assessment and Opening Year Rules for Sole Traders

Updated 11 October 2026 · Fact-checked

A sole trader is taxed by tax year, but the profits come from accounting periods. After the first year, you use the current year basis: the accounting period ending in the tax year. In the opening years, special rules apply, and any profits taxed twice are overlap profits, relieved later.

Understand Basis of Assessment and Opening Years Rules

Income tax runs from 6 April to 5 April. A business chooses its own accounting date, such as 31 December. So you need a rule to decide which profits fall into which tax year. That rule is the basis of assessment.

The normal rule is the current year basis (CYB). The profits taxed for a tax year are those of the 12-month accounting period ending in that tax year. For 2025/26, a 31 December year end means the year to 31 December 2025 is taxed in 2025/26.

The first years need special rules, because there is no full 12-month period ending in the first tax year. Under these rules, the tax year of commencement is taxed on actual profits from the start date to the following 5 April. Some profits are taxed twice. These are overlap profits. You do not lose them. They are deducted when the trade ends or, in part, if the accounting date changes.

A change of accounting date follows its own rules. It is a common Section C topic, and objective test questions often ask which profits are taxed in a given year.

Key rules to remember

Year 1 (tax year of commencement): Actual profits from start date to the following 5 April; Time-apportion accounting period profits to the nearest month, as the exam instructions require.
Year 2 when an accounting period of 12 months or more ends in year 2: 12 months' profits to the accounting date falling in year 2; If an accounting period of 12 months or more ends in year 2, tax the 12 months to that accounting date. This also applies when the first period ended in year 1 and the next 12-month period ends in year 2.
Year 2 when no accounting period ends in the tax year: Actual profits for the tax year (6 April to 5 April); This happens when the first period is long and ends in year 3.
Year 2 when the accounting period ending in year 2 is shorter than 12 months: First 12 months of trading; Applies when the first accounting period ends in year 2 but is under 12 months.
Year 3 onward: Current year basis: the accounting period ending in the tax year; If the accounting period is 12 months, take the whole period.
Overlap profits: Profits taxed more than once in the opening years; Relieved on cessation, or on a change of accounting date if applicable.
Overlap period: Overlap profits = overlap months × monthly profit. The overlap period is the profits from the start of trading to the first 5 April (taxed in year 1 and again in year 2), plus any further months taxed twice because the basis periods of year 2 and year 3 overlap.; Find the months taxed twice from your timeline, then multiply by the monthly profit of the period they fall in.

How to solve Basis of Assessment and Opening Years Rules questions

Work through the timeline first. Do not start with the numbers.

1Write down the start date and the first accounting date. Identify the tax year of commencement (the tax year containing the start date).
2Find the tax year in which the first accounting period ends. This tells you which year 2 rule applies.
3Calculate Year 1: apportion profits from the start date to the next 5 April, to the nearest month.
4Calculate Year 2 using the rule that fits: a 12-month period ending in year 2, the first 12 months of trading, or the actual profits for the tax year.
5Calculate Year 3 onward using the accounting period ending in the tax year (current year basis).
6Identify the overlap profits: the profits that appear in more than one tax year. State the overlap period in months and the amount.
7If the accounting date changes, apply the change-of-date rules. Check the conditions before working out the profits taxed in the year of change.
8Add a final check: the total profits taxed across all years, less the overlap profits, should equal the total profits earned to the end of the last period used.

Quickest way: Timeline-and-months shortcut

When to use it: Use it for objective test questions that ask for the taxable profit in a given tax year or the overlap profits.

Draw a line with the tax years and mark the start date and every year end.
Mark which accounting period ends in each tax year.
Work in months. Compute the monthly profit for each period by dividing profit by the number of months.
Count months of overlap by checking which months are taxed twice.
Multiply the months by the monthly profit to find the overlap profits.
Cross-check that the same month is not taxed three times.

Common mistakes in Basis of Assessment and Opening Years Rules

Taxing the first accounting period in full in the first tax year
Students treat accounting period and tax year as the same thing.
Fix: Year 1 is always the profits from the start date to the next 5 April, apportioned by months.
Using the wrong year 2 rule
There are three possible rules and students apply the first one that comes to mind.
Fix: Ask: does an accounting period end in year 2? If yes, is it 12 months or more? Work through these questions in order.
Forgetting overlap profits
Students stop once the taxable profits are found.
Fix: Always list the overlap profits and when they will be relieved. Write down the months and the amount.
Apportioning to days rather than whole months
It looks more precise.
Fix: The exam instructions say apportion to the nearest month. Use months.
Using the wrong profit figure for apportionment
Students take the profit for the whole period when only part belongs in the year.
Fix: Divide the period's profit by its months, then multiply by the months in the tax year.
Applying the current year basis to the opening years
It is the normal rule, so students use it automatically.
Fix: Use the opening year rules for years 1 and 2, and the current year basis from year 3.

Worked examples

Example 1

Asha starts trading on 1 July 2023 and prepares accounts to 30 April each year. Her first accounts are for the 10 months to 30 April 2024, with a profit of ₹5,00,000. The year to 30 April 2025 shows a profit of ₹7,20,000. Find the taxable profits for 2023/24, 2024/25 and 2025/26 and the overlap profits, using the opening year rules.

Show the solution

2023/24 is the tax year of commencement. It runs from 1 July 2023 to 5 April 2024: 9 months. Monthly profit in the first period is ₹5,00,000 ÷ 10 = ₹50,000. So 2023/24 profit = 9 × ₹50,000 = ₹4,50,000.
2024/25 is year 2 (6 April 2024 to 5 April 2025). The accounting period ending in it is the 10 months to 30 April 2024, which is shorter than 12 months, so use the first 12 months of trading: 1 July 2023 to 30 June 2024.
That is the 10 months to 30 April 2024 (₹5,00,000) plus 2 months (May and June 2024) from the year to 30 April 2025: (2 ÷ 12) × ₹7,20,000 = ₹1,20,000. Total for 2024/25 = ₹6,20,000.
2025/26 is year 3 (6 April 2025 to 5 April 2026). 30 April 2025 falls in this tax year, so the current year basis applies: the year to 30 April 2025 = ₹7,20,000.
Overlap, first part: 1 July 2023 to 5 April 2024 (9 months) is taxed in 2023/24 and again in 2024/25. That is ₹4,50,000.
Overlap, second part: May and June 2024 (2 months) are taxed in 2024/25 and again in 2025/26. That is (2 ÷ 12) × ₹7,20,000 = ₹1,20,000.
Total overlap profits = ₹4,50,000 + ₹1,20,000 = ₹5,70,000 (11 months).
Check: profits taxed = ₹4,50,000 + ₹6,20,000 + ₹7,20,000 = ₹17,90,000. Profits earned to 30 April 2025 = ₹5,00,000 + ₹7,20,000 = ₹12,20,000. The difference is ₹5,70,000, which equals the overlap profits.

Answer: 2023/24: ₹4,50,000; 2024/25: ₹6,20,000; 2025/26: ₹7,20,000. Overlap profits: ₹5,70,000 (11 months).

Example 2

Ben starts trading on 1 October 2024. He prepares accounts to 31 March, with a first period of 6 months to 31 March 2025 and then a 12-month year to 31 March 2026. Profits are ₹3,00,000 for the first period and ₹9,00,000 for the year to 31 March 2026. Find the taxable profits for 2024/25 and 2025/26 and the overlap profits.

Show the solution

2024/25 is the tax year of commencement: 1 October 2024 to 5 April 2025. The first accounting period ends on 31 March 2025, in this same tax year.
Year 1 profit is the actual profit from 1 October 2024 to 5 April 2025. That is the first period of 6 months (₹3,00,000) plus 1 to 5 April 2025, which is 5 days of the next period. Under the nearest-month rule, 5 days is nil months, so year 1 = ₹3,00,000.
2025/26 is year 2. The accounting period ending in 2025/26 is the year to 31 March 2026, which is 12 months. The taxable profit is the 12 months to 31 March 2026 = ₹9,00,000.
Overlap profits: strictly, 1 to 5 April 2025 (5 days) is taxed in both 2024/25 and 2025/26. Rounded to the nearest month, the overlap is nil months. Overlap profits = nil.

Answer: 2024/25: ₹3,00,000; 2025/26: ₹9,00,000; overlap profits: nil (the 5-day overlap rounds to nil months).

Exam tips

Draw the timeline before calculating. It takes 30 seconds and avoids rule errors.
Check which year 2 case applies by asking where the first accounting period ends.
Show the months and the monthly profit in Section C so you earn method marks even if an input is wrong.
State the overlap profits and when they are relieved. This is easy to forget and often has its own mark.
Remember that all workings are to the nearest £ and apportionments to the nearest month.

Practice questions from Income from self-employment

Basis of Assessment and Opening Years Rules in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Basis of Assessment and Opening Years Rules: frequently asked questions

What is the current year basis of assessment?

Under the current year basis, a sole trader is taxed for a tax year on the profits of the accounting period ending in that tax year. It applies from the third tax year onward. The opening years follow special rules.

What are overlap profits?

Overlap profits are profits that are taxed twice in the opening years. They are not lost. They are deducted when the business ceases, or on certain changes of accounting date.

How do I decide which year 2 rule applies?

Look at where the first accounting period ends. If an accounting period ends in year 2, check whether it is 12 months or more. If none ends in year 2, use the actual profits for the tax year.

Does the current year basis change for 2025/26?

The 2025/26 tax year uses the same rules as any other year. Check that the question gives dates and profits, then apply the rule for the relevant year. The Finance Act examined is Finance Act 2025.