25 August 2026

Basis Periods for New Sole Traders: Your First Tax Bill Explained

Starting out as a sole trader means navigating HMRC's rules on basis periods — the time frame used to calculate which profits are taxed and when. Under the new tax year basis rules that took full effect from 2024/25, things work differently to how they did before. Here is exactly what you need to know about your first year's tax bill.

Drafted by EasyTax's automated research pipeline from HMRC guidance and UK legislation, published by Finance Panda Limited on 25 August 2026.

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What Is a Basis Period?

A basis period is the accounting period whose profits HMRC uses to calculate your tax bill for a given tax year. As a new sole trader, understanding this is critical because the dates you choose for your accounting year — and when you start trading — directly affect how much tax you owe and when you owe it.

The Big Change: Tax Year Basis from 2024/25

From the 2024/25 tax year onwards, HMRC moved all sole traders and partnerships onto the tax year basis. This means your taxable profits are now based on the income you earn in the actual tax year (6 April to 5 April), regardless of your chosen accounting year end. This replaced the old 'current year basis' that could create complex overlap profits. If you are starting out now, in 2026, you are beginning under these simpler rules from day one.

Your First Year: What Gets Taxed?

If you start trading part-way through a tax year, HMRC taxes your profits from your actual start date to 5 April of that same tax year. For example, if you began trading on 1 September 2025, your first Self Assessment return (due 31 January 2027) covers profits earned from 1 September 2025 to 5 April 2026.

If your accounting year does not match the tax year — say you use a 31 December year end — HMRC will apportion your profits to calculate what falls within the tax year. You will need to keep records carefully so this apportionment is accurate.

Choosing Your Accounting Year End

You are free to pick any accounting year end you like, but there are practical advantages to each approach:

31 March or 5 April year end: Aligns with the tax year, making calculations straightforward and reducing the risk of apportionment errors.
Other dates (e.g. 31 December): May suit your business cycle but requires apportioning profits across two tax years, adding complexity to your Self Assessment return.

For most new sole traders, a 31 March year end is the simplest choice. HMRC treats this as equivalent to 5 April for tax purposes, so there is no apportionment needed.

Practical Example

Suppose you launch your freelance design business on 1 November 2025 and choose a 31 October year end. By 5 April 2026, you have earned £8,000 in profit. That £8,000 falls within the 2025/26 tax year and will be reported on your Self Assessment return due by 31 January 2027. Your tax-free Personal Allowance (currently £12,570) means you would pay no Income Tax on this amount, though you may still owe Class 4 National Insurance if profits exceed the lower profits limit (£12,570 for 2025/26) and Class 2 NI contributions depending on your profit level.

Payments on Account: Do Not Get Caught Out

If your tax bill for your first year exceeds £1,000 and less than 80% of your tax was deducted at source, HMRC will require payments on account — two advance payments toward your next year's bill. These are each 50% of your previous year's liability, due 31 January and 31 July. As a new sole trader, this can come as a shock, so budget for it from the start.

Key Deadlines to Remember

5 October: Register for Self Assessment if you have not already done so (within your first trading year).
31 January: Online Self Assessment filing deadline and payment of any tax owed, plus first payment on account.
31 July: Second payment on account due.

Get Your Records Right from Day One

Keep clear records of every invoice, expense, and payment from your very first day of trading. Use accounting software that lets you flag the tax year easily, and store receipts digitally. HMRC can request records going back up to six years, and accurate bookkeeping is your best defence in the event of an enquiry — and your best tool for paying exactly the right amount of tax, no more and no less.

Keep reading

Cash Basis & MTD ITSA: Invoice Date vs Payment Date Explained

Under Making Tax Digital for Income Tax Self Assessment, cash basis sole traders must record income when money actually lands in their account — not when they raise an invoice. Getting this wrong could mean misreporting quarterly figures to HMRC. Here's exactly what you need to know.

Cash Basis vs Accruals: When Does a Late Invoice Count as Income?

If a client pays your invoice three months late, do you declare that income in the tax year you raised the invoice or the year you received the money? The answer depends on which accounting method you use — and getting it wrong can land you with an unexpected tax bill. Here is exactly how the rules work for sole traders and freelancers under Self Assessment.

Why Your First Tax Returns Don't Match Your Accounting Year

If you've just started out as a sole trader, your first few Self Assessment returns can look confusing — the income on your tax return often doesn't match your accounting year. This is down to HMRC's basis period rules, which were overhauled in 2024 but still affect how your early years are calculated. Here's what you need to know.

This article is for general information only and does not constitute tax advice. For your specific situation, consult a qualified accountant.

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