Claiming overlap relief | Severn Accounting

Overlap relief is one of those tax reliefs that catches many self-employed people and business owners off guard—yet it can genuinely put money back in your pocket. If you’ve recently transitioned from employment to self-employment, or from a sole trader to a limited company, you may be entitled to claim it. We’ve helped plenty of Worcester-based business owners navigate this, and we wanted to share what you need to know.

What is overlap relief?

When you start a new business as a self-employed person, HMRC assesses your tax based on a “basis period”—typically the first 12 months of trading. However, if your accounting year doesn’t align perfectly with the tax year (6 April to 5 April), you may find that some income gets taxed twice: once in your opening years and again when you close the business or change structure. Overlap relief prevents this double taxation by allowing you to deduct the overlapping income from your final tax bill.

Think of it this way: if you start trading on 1 July 2024 and prepare accounts to 30 June each year, your first tax year (2024/25) will include 10 months of trading (1 July 2024 to 5 April 2025). When you eventually retire or restructure, that 10 months of overlap becomes eligible for relief.

Who can claim overlap relief?

You’re eligible for overlap relief if:

You’ve started trading as a self-employed person or partnership
You’ve incorporated your sole trader business into a limited company
You’ve changed your accounting date
You’re closing your business

The relief applies to unincorporated businesses—sole traders and partnerships assessed under income tax. If you operate as a limited company from the outset, you won’t have overlap relief because corporation tax works differently (companies use corporation tax periods aligned with the tax year).

That said, if you’ve been a sole trader and later incorporated, the overlap relief you accrued carries forward and can be claimed against your final self-employment tax bill in the year of incorporation.

How do you calculate your overlap relief?

The calculation depends on your circumstances, but here’s the basic principle:

For traders with non-aligned year-ends: If your first accounts cover a period longer than 12 months (which is common), the overlap is the number of months between your accounting year-end and 5 April. HMRC will tell you the exact overlap period when they assess your opening years.

For incorporation: Your overlap relief is the total amount of income that was counted twice during your opening years. Your accountant should have this figure on file—it’s usually recorded when your business was set up.

Once you know the overlap amount, you simply deduct it from your taxable profits in the year of claim. If you’re a higher-rate taxpayer (paying 40% income tax), that relief is worth 40p in the pound. For basic-rate taxpayers, it’s worth 20p in the pound.

When should you claim it?

This is crucial: timing matters. You must claim overlap relief in the tax year when:

Your business closes, or
You incorporate your sole trader business into a limited company, or
You change your accounting date (in specific circumstances)

If you miss the deadline, you can’t reclaim it later. The relief essentially disappears. It’s one of those situations where a quick conversation with your accountant before taking action can save thousands of pounds.

For example, if you’re planning to incorporate in 2024/25, you need to claim the overlap relief in your 2024/25 self-assessment return. File it late, and you may lose it entirely.

Practical steps

If you think you might be eligible, here’s what to do:

Check your records. Your accountant should have calculated overlap relief when your business started. It may appear as a memo in your opening tax computations.
Review your reason for claiming. Are you closing the business, incorporating, or changing your year-end? Each has different rules.
Get professional advice. HMRC’s rules on overlap relief are specific, and mistakes can be costly. We always recommend having a qualified accountant review your situation before submitting your return.
Don’t delay. Submit your claim in the appropriate tax year—don’t leave it to the last minute.

Overlap relief exists to prevent unfair double taxation, and it’s your right to claim it. Many business owners simply don’t realise it’s available, and that’s a missed opportunity.

For tailored advice, contact Severn Accounting — we’re here to help.