Farm profits swing with the weather, the store market and the feed bill, but tax bands do not. Farmers' averaging lets you smooth the taxable figure over two or five years, and it now has a link to Making Tax Digital that catches people out.
Farmers' averaging lets a sole trader or partner in a UK farming business add together profits for two consecutive tax years, or five, and be taxed on the average. For two years, the profits of one year must be less than 75% of the other, or one year must be nil. Companies cannot claim, and you cannot use it with the cash basis. Under Making Tax Digital for Income Tax, farmers who claimed averaging on the SA103 page in their 2024 to 2025 return are exempt for 2026 to 2027 without applying.
Averaging is a relief under which a farmer can add together their profits from farming or market gardening for 2 years or 5 years and be taxable on the average, as HMRC's helpsheet puts it. It exists to even out fluctuating results. Since 2016 to 2017 farmers have been able to choose two or five consecutive tax years.
Only individuals qualify. HMRC's manual says claims can be made by individuals alone or in partnership, and companies and corporate partners are excluded. The trade must be farming or market gardening in the UK, which includes intensive rearing of livestock or fish on a commercial basis for food.
You claim in the return for the last year of the period. That year's profit is replaced by the average, and an adjustment to tax and Class 4 National Insurance reflects what the earlier years would have cost on the averaged figures. Your earlier years' bills are not changed, and HMRC says to pay them in full, even if averaging would reduce them, or you may owe interest.
Profits moving is not enough; the swing must be big. For a two-year claim, HMRC's manual says a claim can be made if the profits of one year are less than 75% of the profits of the other year, or the profits of one, but not both, of the years are nil. The helpsheet states the same test as a difference of more than 25% of the better year.
A five-year claim compares the last year with the average of the four before. It works if one of those two figures is less than 75% of the other, or if one or more, but not all, of the five years has nil profit. A trading loss counts as nil for averaging.
The profit used is after capital allowances and balancing charges, so a big machinery purchase can move the figure. A year that has already been averaged is used at its averaged figure in a later claim. The HMRC farmers helpsheet sets conditions for businesses that started or ceased, and for partners who joined or left, so check those first. Our farm expenses and capital allowances guide explains the allowances.
This is an illustration, not a forecast and not advice. Take a sole trader with no other income and profits of £20,000 in year 1 and £60,000 in year 2. The lower figure is under 75% of £60,000, which is £45,000, so the test is met. Averaged, both years become £40,000.
I have used the 2026 to 2027 income tax bands and Class 4 rates of 6% on profits between £12,570 and £50,270 and 2% above for both years, rounded to the nearest pound, and ignored Class 2, student loans, pension relief and other income.
| Illustrative figures, 2026 to 2027 rates applied to both years | Without averaging | With 2-year averaging |
|---|---|---|
| Profit, year 1 and year 2 | £20,000 and £60,000 | £40,000 and £40,000 |
| Income tax, both years | £12,918 | £10,972 |
| Class 4 NIC, both years | £2,902 | £3,292 |
| Total | £15,820 | £14,264 |
The saving is roughly £1,550. Income tax falls because £9,730 of year 2's profit was taxed at 40%, and averaging moves it into the 20% band. Class 4 rises, because profit moves from the 2% rate into the 6% band. Real claims use each year's own rates and put the adjustment in the last year's bill, but the principle holds. Your accountant should run it both ways first.
HMRC's helpsheet is plain: you cannot claim averaging if you have used the cash basis to calculate your profits. The cash basis guidance says the same from the other side: you cannot use it if you are a farming or creative business with a fluctuating profit averaging claim, or a farming business with a current herd basis election.
This matters because cash basis is now the standard way to record income and expenses for sole traders and partnerships. A farmer who wants averaging has to opt out and use traditional accounting, which counts money owed, money owing and closing stock. A higher closing stock valuation raises that year's profit and can change whether the 75% test is met.
The practical point is consistency. Choose the accounting basis and stock method with your accountant, stick to it, and keep the year-end stock schedules. Our farm bookkeeping and HMRC records guide sets out what to record and for how long.
HMRC's manual says averaging will help if the top rate of tax or National Insurance is different in some of the years. It will not help someone chargeable at the highest rate of tax and Class 4 NIC in every year. It may help someone who pays basic rate one year and higher rate another, or who is liable to tax in one year but below their allowances in another.
The typical winner is a lean year next to a strong one that tips into the 40% band. A farm in the same band every year gains little, and because Class 4 moves too, it is not always a saving.
Two cautions from the helpsheet. A claim lapses if the profit for the last year, or any earlier year in the claim, later changes, though you can claim again on the new figures within the time limit for amending the return. And the adjustment lands in the final year's liability. With direct payments being phased out, covered in our BPS phase-out and ELM blog, income swings are unlikely to calm down.
This is where the rules changed, and where some summaries are out of date. GOV.UK's exemptions guidance says you do not need to use Making Tax Digital for Income Tax for the 2026 to 2027 tax year if your 2024 to 2025 return claimed averaging relief as an individual using the SA103 supplementary page. You do not need to contact HMRC.
You must apply for an exemption if you claimed averaging as a partner using the SA104 page in 2024 to 2025, or if you did not claim in that return but reasonably expect to claim in your 2025 to 2026 or 2026 to 2027 return. GOV.UK added the SA104 point on 28 May 2026, so older articles may miss it.
It is temporary. GOV.UK says that if your qualifying income is above £30,000 in the 2025 to 2026 tax year, you will need to use Making Tax Digital for Income Tax from 2027 to 2028. Our Making Tax Digital thresholds guide covers the wider timetable. Check your filed 2024 to 2025 return to see which group you are in.
Keep a one-page schedule of farming profit for each year, after capital allowances, and note any year already averaged. Keep the stock valuations behind each year's accounts, because the profits depend on them.
If you expect to be in Making Tax Digital from April 2027, set up software early. HMRC's helpsheet says that once you are in the system you make claims and adjustments through the software rather than the Self Assessment boxes. Our farm bookkeeping software checklist covers what to look for.
FarmHQ is a mobile-first farm office app for UK livestock farms, in pre-launch beta, where Ask Farmer Joe drafts and you confirm. It gives no tax advice. See pricing. This guide is general information, so take your own figures to your accountant.
For a two-year claim, the profit of one year must be less than 75% of the profit of the other, or the profit of one year, but not both, must be nil. HMRC's helpsheet states the same thing as a difference of more than 25% of the better year.
Yes. Farmers and market gardeners can choose two or five consecutive tax years. A five-year claim compares the last year with the average of the four before it, and the volatility test is the same 75% comparison. Losses count as nil profit for averaging.
No. Averaging is for individuals, either alone or in partnership. HMRC's business income manual excludes companies and corporate partners, so a farm run through a limited company cannot make a claim, though individual partners in a farming partnership can.
Not for 2026 to 2027 if your 2024 to 2025 return claimed averaging on the SA103 page. Partners who used SA104, or farmers who expect to claim, must apply for an exemption. It is temporary, and MTD can apply from 2027 to 2028.
No. HMRC says averaging does not change the tax and National Insurance you pay for earlier years. The adjustment for all the years in the claim goes into the last year's liability. Pay the earlier years in full to avoid interest.