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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Averaging: introduction

S221-S225 Income Tax (Trading and Other Income) Act 2005

Averaging is a special relief available to two classes of individual:

  • farmers and market gardeners,
  • creators of literary or artistic works.

There is an introduction to the relief in the Self Assessment Tax Return Help Sheets:

  • Farming and market gardening HS224.
  • Creators of literary or artistic works HS234.

The way in which the relief operates is, very briefly, as follows. Claims are made in respect of two consecutive tax years in the return for the later year. The profit for that year is adjusted to half the total profit for that year and the previous year. In addition an adjustment in terms of tax is made to the tax due for the later year. The amount of the adjustment (which may be an increase or a decrease) is the amount by which the tax and NIC for the previous year would have changed if the profit for that year had been adjusted to the average figure. The relief does not apply unless the profits for the two years differ by more than 25% of the higher figure.

Averaging will only help if the top rate of tax or NIC is different for each of the two years. For example:

  • averaging will not help a person who is chargeable to the highest rate of tax and Class 4 NIC for each year,
  • averaging may help a person who pays tax at the basic rate one year and higher rate the other.
  • averaging may help a person who is liable to tax one year but whose income falls so they are not liable the next.