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HMRC internal manual

Business Income Manual

Averaging: marginal relief

S223 Income Tax (Trading and Other Income) Act 2005

Marginal relief may be claimed where the difference between the two profit figures is between 25% and 30% of the higher of the two. This avoids a disproportionate change in the tax bill near the point where full averaging ceases to apply. If the difference is 25% or less of the higher figure no relief is available.

Relief is computed by adjusting both profit figures by a similar amount. The amount is three times the difference less 3/4 of the higher figure. This can be expressed in the formula:

A = ( 3 x D ) - ( 3/4 x H )

where A is the amount of the adjustment, D is the difference and H is the higher profit figure.

Example - marginal relief

Farm profits are as follows:

Basis period year to 31 December 2011 £40,000
Basis period year to 31 December 2012 £29,000

The taxable trade profits are therefore as follows:

2011-12 £40,000
2012-13 £29,000

The difference between the two figures is £11,000 (£40,000 - £29,000).

This is equal to £11,000/£40,000 x 100 = 27.5% of the higher figure.

Full averaging is not available as the difference is less than 30% of the higher figure. It does, however, fall between 25% and 30% so a marginal adjustment, if claimed, is made as follows:

(3 x £11,000) - (3/4 x £40,000) = £3,000.

Profits after marginal adjustment are:

2011-12 (£40,000 - £3,000) = £37,000.

2012-13 (£29,000 + £3,000) = £32,000.

Self-assessments become:

Tax year Self-assessment
2011-12 £40,000 (no change)
2012-13 £32,000

A tax adjustment is made for 2012-13 equal to the reduction in the tax charge for 2011-12 had the self-assessment been reduced from £40,000 to £37,000. See BIM84145 for a more detailed explanation of the relief due from an averaging claim.