Farm Income Tax Averaging
Farmers can average their income over 2 or 5 years to smooth tax liability caused by volatile profits (weather, market prices, subsidy changes).
Frequently Asked Questions
Farming income averaging allows farmers to average their trading profits over 2 or 5 consecutive years, reducing the effect of year-to-year volatility on income tax bills. It's available under ITTOIA 2005 sections 221-225.
UK individual farmers (including partners in farming partnerships) who are trading as farmers can average their income. It applies to farming profits and some related agricultural activities.
You compare profits from the current year and the previous year. If the lower year is less than 75% of the higher year, you can average them. Tax is recalculated as if each year had half the total profit.
Extended to 5 years in 2016. You can average any consecutive 5-year period, not just the most recent 2 years. This is particularly useful for very volatile farming businesses.
When profits vary significantly year-to-year — for example, a bumper harvest year followed by a drought year. The benefit comes from keeping income within lower tax bands rather than paying higher rates in good years.
Claim on your self-assessment tax return for the relevant year. The election is made in Box 5.2 of the SA103F (full farm pages). Your accountant can identify the optimal years to average.
Yes. Class 4 NIC is calculated on profits. If averaging reduces the income peaks, Class 4 NIC may also be reduced in high-profit years.
Losses are treated as zero for averaging purposes. You cannot create a loss by averaging. Averaging is only available when both years show a profit.
For 2-year averaging, the profits in the lower year must be less than 75% of the higher year to qualify. If both years are similar, averaging produces no tax saving and you wouldn't need to claim.
Yes. Pension contributions reduce relevant UK earnings (which are the basis for pension contribution limits). Averaging changes your taxable profit, which may affect how much pension you can contribute in each year.
No. Income averaging is only available to individuals (sole traders and partnerships). Farming companies pay corporation tax and do not have access to income averaging.
The averaging period is interrupted. You cannot average income across different business structures. Seek specialist agricultural tax advice before changing business structure.