Basis period reform feels like old news. The transitional year was 2023/24, overlap relief was claimed, the spreading election was made, and the profession moved on to quarterly updates. Yet for a large number of sole traders and partners, transition profits are still sitting in the tax computation, quietly changing the answer to questions that have nothing to do with trading income.
The returns your firm is filing between now and the 31st of January 2027 are 2025/26 returns. That is the third of five spreading slices. Two more follow, in 2026/27 and 2027/28. And 2025/26 is also the first year of the Winter Fuel Payment charge, a cliff edge test that works on a different measure of income from the one most practitioners have in their heads.
Where Transition Profits Sit in the Tax Calculation
The mechanics matter, because every threshold question flows from them. Transition profits are relieved as normal at Step 2 of the income tax calculation in section 23 ITA 2007. Whatever remains is then removed from net income, a standalone amount of tax is calculated on it, and that amount is added back at Step 4.
The standalone figure is the difference between the tax that would have been payable with transition profits left in net income and the tax payable with them taken out. That design does two useful things. It lets the personal allowance and other reliefs be set against transition profits, and it lets the tax reducers in section 26 ITA 2007, such as EIS, SEIS, VCT and double taxation relief, be offset against the resulting charge.
It also means transition profits are outside net income for anything that keys off net income or adjusted net income. That is where the inconsistencies start.
The Thresholds Transition Profits Do Not Reach
- High Income Child Benefit Charge. HICBC works on adjusted net income, so transition profits should not, on their own, push a client over the threshold.
- Pension annual allowance taper. The taper calculation is based on net income, so transition profits should not trigger tapering.
- Capital gains tax rates. HMRC's view is that CGT rates are not affected, because transition profits are not charged at any particular rate of income tax. Helpfully, since transition profits are not in Step 3 income, the unused part of the basic rate band remains available for gains.
- Averaging for farmers and creative artists. Transition profits are left out of averaging, although transition losses may need to be taken into account.
- Universal credit and tax credit earnings. Transition profits should not be included in the earnings reported, though the extra tax and NIC paid can still affect a universal credit award.
The Thresholds They Do Reach
- Personal allowance tapering. This one catches people out. Because the standalone charge compares the position with and without transition profits in net income, the taper is still felt. A client with standard part profits of £100,000 and a spread slice of £20,000 effectively loses £10,000 of personal allowance.
- Class 4 National Insurance. Payable on the spread transition profits brought into account each year.
- Relevant UK earnings for pension tax relief. Transition profits do count. HMRC has confirmed this, despite some software having taken the opposite view, so it is worth testing what your own computation produces before you advise on a contribution.
- Student loan repayments. Taken into account, as are household income assessments for student finance.
The New Variable: The Winter Fuel Payment Charge
From 2025/26, the Winter Fuel Payment and the Scottish Pension Age Winter Heating Payment are clawed back from recipients whose income exceeds £35,000, unless they received universal credit, pension credit, income based jobseeker's allowance, income support or income related employment and support allowance in the qualifying week. For the 2026 payment, that week began on the 21st of September 2026.
Three features make this a live issue for practices with older self employed and partner clients:
- It is a cliff edge. At £35,000 the client keeps the payment in full. At £35,001 the whole payment is recovered.
- The test uses taxable income, not adjusted net income. Pension contributions and gift aid donations do not reduce it, and only the individual's own income counts, not a spouse's.
- It lands in Self Assessment. For 2025/26 the payment goes in box 1 on page TR5, and HMRC will often prepopulate it online. For clients outside Self Assessment it is collected through the tax code, and HMRC plans to collect both the 2026/27 and 2027/28 charges through the 2027/28 code.
For clients in Making Tax Digital for Income Tax, HMRC has said it intends to collect the charge through the end of year return from 2026/27. Firms with clients who joined testing early should note that the 2025/26 charge cannot be included there and HMRC will make separate arrangements.
The Open Question Worth Documenting
Here is the point being debated in practice right now. The Winter Fuel Payment charge tests taxable income, while transition profits are charged to income tax but removed from net income at Step 3. Practitioners are asking which measure HMRC's own calculation actually applies to a client with a spread slice sitting just below or just above the £35,000 line.
Until that is settled beyond doubt, treat it as a documented judgement rather than an assumption. Identify the clients where the answer changes the result, keep the computation and your reasoning on file, check what your tax return production software produces against HMRC's calculation, and tell the client in writing that a few hundred pounds may turn on it. A clear note now is far cheaper than a reconstruction in April.
Payments on Account and the End of Spreading
Payments on account are based on the prior year liability, so transition profits have been inflating them since 2024/25. Two moments need watching. The first is any year in which a client elects to accelerate spreading, which pushes the following year's payments on account above the real liability. The second is the end of the spreading period after 2027/28, when the slices stop but the payments on account do not adjust themselves. Reviewing whether to claim a reduction is a five minute job that protects client cash flow and your firm's reputation.
Cessation is the sharper risk. If a client stops trading during the spreading period, all remaining transition profits are brought into account in the year of cessation. A retiring client with two slices left can therefore face an unusually large final liability, a higher payment on account, personal allowance tapering and a Winter Fuel Payment clawback in the same year.
A Ten Minute Review You Can Run This Month
- Run a list of every client with transition profits still to be brought into account in 2025/26, 2026/27 and 2027/28.
- Flag anyone whose income lands within a few thousand pounds of £35,000, £50,000, £60,000, £80,000 or £100,000, and note which measure of income each threshold uses.
- Identify clients at or above state pension age who received a winter payment, and confirm the figure going on the return.
- Check whether any client is likely to cease trading before 2027/28 and model the bunching effect.
- Review payments on account for clients who accelerated spreading, and diarise the end of spreading review for 2028.
- Note the opt out position for future years. Scottish clients can still opt out of the 2026 Pension Age Winter Heating Payment until midday on the 19th of October 2026, and clients who previously opted out but want the 2026 payment have until the 31st of March 2027 to opt back in.
The Bottom Line
Transition profits are not a 2023/24 story. They are a live component of the next two filing seasons, and they interact unevenly with a growing set of cliff edge income tests. The firms that handle this well will not be the ones that remember the rules from three years ago. They will be the ones whose software, workpapers and client lists make it obvious which thresholds each client is near, before the computation is finalised.
If your practice is already using TaxCalc Tax Return Production alongside Practice Manager, that is the combination to lean on here: get the transition profit figures and spreading elections visible in the client record, and build the threshold review into your January workflow rather than leaving it to whoever happens to pick up the file.
