13 August 2026

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.

Drafted by EasyTax's automated research pipeline from HMRC guidance and UK legislation, published by Finance Panda Limited on 13 August 2026.

This article predates our editorial review gate and has not been individually checked by a person. We are working back through the archive. Treat the figures and dates here as a starting point and verify anything you are about to act on.

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What Are Basis Period Rules?

As a sole trader, you pay Income Tax on your profits based on a 'basis period' — the chunk of time whose profits are counted for a given tax year. HMRC moved to a new 'tax year basis' from 2024/25 onwards, meaning most established sole traders now simply report profits from 6 April to 5 April each year. But if you're in your first few years of trading, the transitional and opening year rules still shape what goes on your returns — and they can catch new freelancers completely off guard.

The Opening Year Rules Explained

In your first three years of trading, HMRC uses specific rules to work out which profits fall into which tax year. Here's how it typically works:

Year 1 (the tax year you start trading): You're taxed on profits from your actual start date to the following 5 April, regardless of your accounting year end.
Year 2: If your first accounting period is 12 months long and ends in Year 2, you're taxed on those 12 months' profits. If it's shorter or longer, different rules apply — HMRC has specific guidance for each scenario.
Year 3 onwards: You move to the current year basis, taxed on profits for the 12-month accounting period ending in that tax year.

A Practical Example

Suppose you started freelancing on 1 October 2024 and chose 30 September as your accounting year end. Your first accounts run from 1 October 2024 to 30 September 2025.

2024/25 tax return: You report profits from 1 October 2024 to 5 April 2025 — just six months, even though your accounting year runs to September.
2025/26 tax return: You report profits for the 12 months to 30 September 2025 — your first full accounting year.
2026/27 tax return: You report profits for the 12 months to 30 September 2026, now fully on the current year basis.

Notice that the profits from October 2024 to April 2025 are included in both the 2024/25 and 2025/26 returns. This overlap was historically managed through 'overlap relief', which was largely eliminated during the 2023/24 transitional year. If you started trading before April 2024, check whether you have any residual overlap relief to claim.

Why This Matters for Your Cash Flow

Because your first tax return may only cover a partial year of trading, your tax bill that year might look reassuringly small. Don't be lulled into a false sense of security. The following year's bill — covering a full 12 months — can come as a shock, especially when HMRC also asks for a Payment on Account for the year ahead. Budget carefully from day one and set aside at least 25–30% of your profits each month for tax.

Choosing Your Accounting Year End

New sole traders can choose any accounting year end they like, but this choice has real consequences for the basis period rules above. A 31 March or 5 April year end aligns neatly with the tax year, simplifying your returns and reducing the risk of confusion. If you choose a different date, your early returns will almost certainly cover periods that don't match your accounts — make sure your bookkeeping software or accountant can handle the split.

Action Steps for New Sole Traders

Register for Self Assessment with HMRC as soon as you start trading — you must register by 5 October after the end of your first trading tax year.
Keep records from your very first day, not just from your chosen accounting year end.
Consider using 31 March as your year end to keep things simple.
Use the EasyTax profit calculator to estimate your first-year tax bill and avoid nasty surprises.
If you started before April 2024, check your overlap relief position — any unused relief should have been applied in the 2023/24 transitional return.

The opening year rules are one of the less intuitive corners of UK tax, but once you understand the logic, they're manageable. Get your year end right from the start and keep clean records — future you will be very grateful.

Keep reading

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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.

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.

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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