What is overlap relief?

The tax year runs from the 6April to 5 April the following year.

When you begin self employment, very few, probably no business owners ever wait until 6 April to commence trading. Instead you probably decided to start on a Monday and that was the extent of your planning.

As a sole trader you can choose your first year end. So say for example, you began your business on 7 November. I would say that you now have a decision to make. You can either make 31 October your year end or you could go for a shorter period to start with and make 31 March your year end (this is the date most use for the end of the tax year as 5 April can be a bit fiddly).

The common misconception

Now you may be tempted to go for the October year end. I’ve seen many business owners make the following assumption:

  • Business started trading: 7 November 2014
  • Chosen year end: 31 October 2015
  • Year end falls into 2015/16 tax year so this is the tax return that any profits are reported in.

This is incorrect.

As you started trading within the 2014/15 tax year you will need to complete a 2014/15 tax return. Your self employment profits between 7 November 2014 and 31 March 2015 will need to be reported and taxed.

Then in your 2015/16 tax return you will need to show your whole year's profits, so 7 November to 31 October 2015.

In your 2016/17 tax return it will be your accounts from 1 November 2015 to 31 October 2016 and so on.

You may have noticed that you have been taxed on the profits made between 7 November and 31 March twice. That is correct. When you cease trading this tax is then offset against your final period and it’s called overlap relief.

Some people are more than happy to incur overlap relief; I know many businesses owners who choose to. If you choose not to, then make your first year end 31 March and then run your accounting year in line with the tax years.

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