Get your overlap relief figure

If you’re changing the way you work—perhaps moving from sole trader to limited company, or vice versa—you may be entitled to overlap relief. It’s one of those tax reliefs that often gets overlooked, but getting it right can save you a considerable amount. Let’s walk through what overlap relief is, why it matters, and how to work out your figure.

What is overlap relief?

Overlap relief exists because of how the UK tax system charges income from a self-employed business. When you start trading, HMRC assesses you on a “basis period”—typically the first year of trading runs from your start date to 5 April. The second year follows the normal tax year (6 April to 5 April). This creates a period where some income gets taxed twice: once in your opening years and again when you switch to the standard tax year basis.

The same issue arises when you change your accounting year-end or cease trading. Overlap relief allows you to deduct that overlapped income from your taxable profits, either when you change basis or when you cease trading.

When can you claim overlap relief?

You’re most likely to use overlap relief in these situations:

Change of basis period. If your accounts currently run to a date other than 5 April, you might align them with the tax year to simplify administration. When you do, you’ll have overlapping profits to account for.

Cessation of self-employment. When you stop trading as a sole trader—perhaps because you’ve incorporated your business into a limited company—you can claim overlap relief against your final year’s profits.

Change of accounting date. If you shift your year-end from one date to another, overlap can occur. For example, moving from 31 December to 30 June creates overlap that you can relieve.

Transition to limited company. This is common. If you’ve been operating as a sole trader and form a company, your sole trader business ceases. You can claim overlap relief against those final trading profits.

The key point: you can only claim overlap relief once, and only in the specific circumstances above. You can’t just use it whenever you fancy reducing your tax bill.

How do you calculate your overlap relief figure?

The calculation depends on your situation. Let’s assume the most common scenario: you’re ceasing as a sole trader because you’re incorporating.

Your overlap relief figure equals the profits assessed twice. Typically, this is the profits from your opening year that were also charged in your second year of trading.

Example (illustrative):

You started trading on 1 June 2019
Your first tax year ran 1 June 2019 to 5 April 2020 (10 months)
Your second tax year ran 6 April 2020 to 5 April 2021 (full year)
The overlapped period is 1 June 2019 to 5 April 2020 (10 months)

If your profit for that 10-month period was £25,000, your overlap relief is £25,000.

When you cease trading and incorporate, you claim that £25,000 against your final year’s sole trader profits, reducing your tax liability.

If you changed your accounting date mid-stream—say, from 31 December to 30 June—the overlap would be the profits from the period covered twice. HMRC’s Self Assessment manual (SA/BIM) contains detailed guidance on calculating overlap for different scenarios.

Finding your overlap relief figure

If you’ve been self-employed for years and never calculated overlap, don’t panic. Your tax return should reference it. Look at your SA302 form (the HMRC calculation of your tax) from when you changed basis or ceased trading. It should show any overlap relief claimed.

Alternatively, check your original tax returns from your early years of trading. The notices of assessment should clarify the basis periods used. If records are patchy, HMRC can help—though it’s quicker if you have the information to hand.

Why get this right?

A missed overlap relief claim means overpaying tax. If you incorporated your business without claiming overlap, you’ve potentially left money on the table. The good news: you may be able to amend previous returns if you’re within four years.

Equally, claiming overlap incorrectly—or twice—will attract penalties and interest. It’s worth getting this sorted properly.

Conclusion

Overlap relief is a legitimate way to avoid being taxed twice on the same profits. Whether you’re changing your accounting date, incorporating, or ceasing trading, establishing your overlap relief figure is essential. It needn’t be complicated, but it does require clarity on your basis periods and the profits affected.

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