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Taxation (UK) · Income from self-employment

Closing Year Rules and Cessation of Trade for Sole Traders

Updated 11 October 2026 · Fact-checked

When a sole trader stops trading, the final tax year is assessed on profits arising from 6 April to the cessation date, so it can never exceed 12 months. You then deduct any unrelieved overlap profits. Final capital allowances are a balancing allowance or charge. No writing down allowance is given, and no AIA or FYA on expenditure in the period of cessation.

Understand Closing Year Rules and Cessation of Trade

Under the current rules (from 2024/25), a sole trader is taxed on the profits arising in the tax year, 6 April to 5 April. Where the accounting date is not 5 April, you time-apportion the profits of the accounting periods that overlap the tax year. The opening years rules can tax the same profits twice. The profits taxed twice are called overlap profits. The closing year rules give you the relief for them.

The final tax year is the year in which the trade ceases. Its basis period runs from 6 April to the date of cessation. So it is never longer than 12 months. It often covers part of one accounting period plus a stub period up to cessation.

You deduct any unrelieved overlap profits from the final year's assessment. Each overlap profit is relieved once only. This is how a trader gets back the double tax suffered at the start. You deduct the overlap profits after you have added up all the profits in the final basis period.

Capital allowances work differently in the last period of account. No writing down allowance is given. AIA and FYA are not given on expenditure in the period of cessation. Instead you bring in the disposal value of each asset, capped at cost. Assets the owner keeps are treated as sold at market value. The pool then closes with a balancing allowance if the total disposal value is below the pool balance. It closes with a balancing charge if the value is above it.

Remember also that a loss in the final 12 months may qualify for terminal loss relief. This is covered under trading losses.

Key rules to remember

Final year basis period
From 6 April in the tax year of cessation to the date of cessation
A tax year's profits are those arising from 6 April to 5 April, found by time-apportioning the accounting periods. The final year therefore cannot exceed 12 months.
Final year assessment
Profits of the final basis period (after capital allowances) − unrelieved overlap profits
Overlap profits are relieved once only. In the exam, work out the profit first, then deduct overlap profits.
Capital allowances in the final period
Pool balance + additions − disposal values (each capped at cost) = balancing allowance (if positive) or balancing charge (if negative)
No WDA is given in the final period. AIA and FYA are not given on expenditure in the period of cessation, so additions just go into the pool. Use the disposal value capped at cost for each asset. Assets kept by the owner are taken at market value.
Class 4 NIC rates
6% on profits of £12,571 to £50,270; 2% above £50,270; nil up to £12,570
Class 4 NIC is based on the same assessable profits as income tax, after overlap relief.

How to solve Closing Year Rules and Cessation of Trade questions

Use this order for any cessation question. It stops you mixing up the periods and losing marks.

  1. 1Identify the date of cessation and the tax year it falls in. That is the final tax year, and its basis period is 6 April to the cessation date.
  2. 2For each earlier tax year, the profits are those arising from 6 April to 5 April. Time-apportion the accounting periods that overlap it.
  3. 3For the final year, list the accounting periods and stub periods that fall between 6 April and the cessation date. Time-apportion any period that starts before 6 April.
  4. 4Adjust the trading profit for each period. Then deal with capital allowances. Do not give WDA in the final period, and do not give AIA or FYA on expenditure in the period of cessation. Compute the balancing allowance or charge instead.
  5. 5Time-apportion to the nearest month, as the supplementary instructions require. Add the results to get the total for the final basis period.
  6. 6Deduct the overlap profits brought forward and state clearly that they are relieved once only.
  7. 7Compute the tax or Class 4 NIC if asked. Show every working, as workings are needed in Section C.

Quickest way: Final year in five lines

When to use it: Use this for objective test questions asking for the final year assessment, and as a skeleton for a Section C answer.

  1. Write the final basis period dates first: 6 April to the cessation date.
  2. Add the profits falling inside it, using the time-apportioned or period profit.
  3. Take off any balancing allowance, or add any balancing charge.
  4. Deduct overlap profits.
  5. Check the result is not negative before you move on, and that you did not use the same profits in an earlier tax year.

Common mistakes in Closing Year Rules and Cessation of Trade

  • Giving writing down allowance in the final period, or AIA or FYA on expenditure in the period of cessation.

    Students follow the routine pool layout from earlier periods.

    Fix: In the final period, stop and compute the balancing allowance or charge. Only a balancing adjustment goes in the final computation.

  • Using the accounting period ending in the tax year as the basis period.

    It was the old rule, and many study notes still show it.

    Fix: Under the current rules a tax year is assessed on profits arising from 6 April to 5 April. Time-apportion the accounting periods. In the final year, the basis period is 6 April to cessation.

  • Forgetting to deduct overlap profits, or deducting them twice.

    Overlap profits appear in the question only as a single figure and are easy to overlook.

    Fix: Make the overlap deduction the last line of every final year working. Tick it off once.

  • Valuing assets kept by the owner at nil or at cost.

    No cash is received, so students think there is no disposal.

    Fix: Treat the asset as sold at market value, capped at original cost, and include it in the pool.

  • Letting disposal proceeds exceed cost in the pool.

    Students enter the full selling price of an asset that sold at a gain.

    Fix: Deduct the lower of proceeds and cost from the pool. Any excess is a capital gain, dealt with under chargeable gains.

  • Taxing the same profits in both the penultimate and the final year.

    Students apportion the last accounting periods without checking which months have already been used.

    Fix: Draw a short timeline. Each month of profit belongs to one tax year only, split at 5 April.

Worked examples

Example 1

Sam has traded for many years with a 30 June year end. He ceased trading on 31 December 2026. Adjusted trading profits after capital allowances: year ended 30 June 2025 £48,000; year ended 30 June 2026 £60,000; six months from 1 July 2026 to 31 December 2026 £27,000. Overlap profits from the opening years were £14,000. Compute the trading income assessments for 2025/26 and 2026/27 under the current tax-year basis.

Show the solution
  1. 2025/26 covers 6 April 2025 to 5 April 2026. Profits arising in it come from two accounting periods.
  2. 6 April 2025 to 30 June 2025 is 3 months of the year ended 30 June 2025: 3/12 × £48,000 = £12,000.
  3. 1 July 2025 to 5 April 2026 is 9 months of the year ended 30 June 2026: 9/12 × £60,000 = £45,000.
  4. 2025/26 assessment = £12,000 + £45,000 = £57,000.
  5. Final tax year: cessation on 31 December 2026 falls in 2026/27. The final basis period is 6 April 2026 to 31 December 2026, which is 9 months.
  6. 6 April 2026 to 30 June 2026 is 3 months of the year ended 30 June 2026: 3/12 × £60,000 = £15,000.
  7. Add the final stub period: £15,000 + £27,000 = £42,000.
  8. Deduct overlap profits: £42,000 − £14,000 = £28,000.

Answer: 2025/26: £57,000. 2026/27: £28,000.

Example 2

Priya ceased trading on 31 March 2027. Her accounting date is 31 March. Her final period's adjusted profit before capital allowances is £40,000. The main pool has a tax written down value of £30,000 brought forward. During the final period, she sold plant for £21,000 (below cost). She kept other plant with a market value of £4,000 (cost £9,000). Overlap profits are £6,000. Compute the 2026/27 assessment.

Show the solution
  1. Final tax year is 2026/27. The final basis period is 6 April 2026 to 31 March 2027. Her accounting period 1 April 2026 to 31 March 2027 matches the tax year for this purpose, so the profit is £40,000 before capital allowances.
  2. Disposal values: £21,000 + £4,000 = £25,000. Neither exceeds cost.
  3. Main pool: £30,000 − £25,000 = £5,000. The value is below the pool balance, so this is a balancing allowance of £5,000.
  4. No WDA is given in the final period, and there is no AIA or FYA as there is no expenditure.
  5. Profit after capital allowances: £40,000 − £5,000 = £35,000.
  6. Deduct overlap profits: £35,000 − £6,000 = £29,000.

Answer: Balancing allowance £5,000. Trading income assessment for 2026/27: £29,000.

Exam tips

  • Write the final basis period dates before any numbers. Marks are often given for the correct dates.
  • In Section C, show a short capital allowances working with a balancing allowance or charge. State that no WDA is given in the final period, and that AIA and FYA are not given on expenditure in the period of cessation.
  • In OT questions, check whether the question has already deducted overlap profits before you subtract them again.
  • Always state the rounding and apportionment convention you used: nearest month and nearest £.
  • If the trader makes a loss in the final period, say that terminal loss relief may be available, and link it to trading losses.

Practice questions from Income from self-employment

Closing Year Rules and Cessation of Trade: frequently asked questions

What is the closing year rule for a sole trader?

The final tax year is assessed on the profits arising from 6 April to the date of cessation, so it is never longer than 12 months. Unrelieved overlap profits are then deducted from that assessment.

How do you relieve overlap profits on cessation?

You deduct the unrelieved overlap profits from the final year's assessment. Each overlap profit is relieved once. They represent profits taxed twice at the start of the business.

Do you get writing down allowance in the final period?

No. No writing down allowance is given in the final period. AIA and FYA are also not given on expenditure in the period of cessation. You calculate a balancing allowance or a balancing charge on the pool instead.

What happens to assets the owner keeps after the trade stops?

They are treated as sold at market value on the cessation date. The disposal value, capped at cost, goes into the pool. This can create or reduce a balancing allowance, or create a balancing charge.