Using the Transition Profit wizard from 2024/25: Worked example

When processing the information for the 2024/25 tax year, the Basis Period Reform will have already taken place. If you are unfamiliar with the rules surrounding this, it is recommended that you review the information enclosed in this HMRC webpage.

If you previously reported either partnership or self employment profits using a non-aligned accounting period, the remaining days after your accounting period end, up to the tax year end (31 March - 5 April) would have been defined as Transition profits and sent to HMRC in your 2023/24 tax return. 

The transition profits are assessed over 5 years, 20% each year starting from 2023/24, with the option of allowing users to accelerate the profits assessed in a tax year, if preferred. You will therefore need to include the details of any transition profits in the 2024/25 tax year to ensure that the remaining profits are charged on the tax return as required. 

For the 2023/24 tax return, the details below were submitted to HMRC for a sole trader:

Standard trading profits of £38,020

Transition profits of £10,000

Total transition profits assessed in the 2023/24 tax year: £2,000 (20% default) + £500 (accelerated due to pension contributions extending the basic rate tax band). If TaxCalc was used to enter transition profits in 2023/24, the brought forward transition profit entries will be carried forward to the 2024/25 return (based on the details held on the 2023/24 return when the 2024/25 return is created), meaning you will only be required to populate any additional amount taxable in 2024/25 (claim for acceleration). If TaxCalc was not used in 2023/24, manual entries should be made.

The transition profit calculations can found by clicking on the wizard next to box 73.3 (SimpleStep > Self-Employment > Full Form - Details > Calculating your taxable profit or loss > Click the wizard for 'Spread of the transition profit treated as arising in this tax year'.  Entries should be made for the original transition profits along with any accelerated amounts in order to calculate transition profits to be assessed in the current year. The accelerated amount taxed in 2023/24 should be multiplied by 5/4 in order to calculate the correct amount to be spread over the remaining four years. This is because it will be multiplied by 20% to calculate taxable transition profits for the year:

£9,375 @ 20% = £1,875 which will be paid for the next four years, if no further transition profits are accelerated

£1,875 x 4 years = £7,500 - the actual remaining taxable transition profits.

Therefore the expected entries for the 2024/25 tax year would be as displayed in the screenshot below, assuming that there are no accelerated profits to be taxable this year: