Averaging lets farmers, market gardeners and people whose profits come mainly from their own creative works be taxed as if their profit for consecutive years were the average of those years. Everyone eligible can average over two years when profits are volatile; farmers and market gardeners can instead average over five years. It only saves tax when the averaged years would otherwise fall into different tax or National Insurance bands.

Who can claim averaging?

The relief is in Chapter 16 of Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), sections 221 to 225. Section 221 allows an individual to claim if they carry on, alone or in partnership, a qualifying trade, profession or vocation and their profits from it fluctuate. A trade qualifies if it is:

  • farming or market gardening in the UK;
  • the intensive rearing in the UK of livestock or fish on a commercial basis for the production of food for human consumption; or
  • one where the taxpayer’s profits are derived wholly or mainly from creative works: literary, dramatic, musical or artistic works or designs created personally by the taxpayer or, in a partnership, by one or more of the partners.

HMRC treats “wholly or mainly” as satisfied where more than 50% of the profit comes from qualifying creative works (BIM84060). Authors living on royalties and advances, and software writers paid royalties for code protected by copyright, can qualify. People selling services cannot, so an architect or a programmer paid to write scripts does not qualify even if some output is protected by copyright (HS234). Works of craft such as furniture making are excluded, as are people who manage creative work produced by employees.

Companies, including corporate partners, cannot claim (BIM84050). Agricultural contracting does not qualify because it does not involve occupying farm property, and a trade that includes substantial non farming activity, such as haulage or a caravan site alongside farming, is also outside the relief (BIM84055).

Why can’t cash basis businesses average?

Averaging is not available if profits are calculated on the cash basis (HS224 and HS234). That trap has become more common because GOV.UK now describes the cash basis as the standard way for sole traders and partnerships without corporate partners to record income and expenses. A farmer or author who wants to average must opt for traditional (accruals) accounting for the years concerned. The page on cash basis versus accruals accounting explains the wider differences.

When are profits volatile enough for two year averaging?

Under ITTOIA 2005 s222, a two year claim can be made for two consecutive tax years if the profits of one year are less than 75% of the profits of the other, or the profits of one (but not both) years are nil. A loss counts as nil profit (s221(5)), so the loss itself remains available for relief under the normal rules. Marginal relief, which gave partial averaging where the figure fell between 70% and 75%, was repealed by the Finance Act 2016; 2015 to 2016 was the last year it could be claimed (BIM84135).

A claim cannot be made for the tax year in which the trade starts or permanently ceases (s222(4)). The earlier of the two years can be a year that has already been averaged, but no claim can be made for a year if a later year has already been averaged (s222(2) and (3)). In practice claims roll forward year by year.

HMRC’s example (HS224): John has profits of £40,000 in 2024 to 2025 and £10,000 in 2025 to 2026. If he claims, each year’s profit becomes £25,000. Ian has a profit of £32,000 in 2024 to 2025 and a loss of £20,000 in 2025 to 2026. The loss counts as nil, so each year’s averaged profit is £16,000 and the £20,000 loss is still claimed separately.

How does the five year option work?

From 2016 to 2017, farmers and market gardeners can choose to average over five consecutive tax years instead of two (BIM84115). Section 221(2A) confines the five year option to farming, market gardening and intensive rearing; creators of literary or artistic works can only use two year averaging.

The volatility test for a five year claim is in s222A(2). Either the average of the profits of the first four years, or the profit of the fifth year, must be less than 75% of the other; or the profits of one or more (but not all) of the five years must be nil. HMRC’s helpsheet expresses the same test as the difference between the two figures exceeding 25% of the higher one.

HMRC’s example (HS224): Phoebe’s profits for 2021 to 2022 through 2025 to 2026 are £20,000, £50,000, £20,000, £50,000 and £60,000. The average of the first four years is £35,000, and the £25,000 gap between that and £60,000 is more than 25% of the higher figure (£15,000), so the condition is met. Averaging over five years gives £40,000 for each year, reducing her 2025 to 2026 profit by £20,000.

A five year claim suits a farm whose income swings with prices, weather or disease over several seasons, because it smooths a run of good and bad years rather than just a pair. Any of the first four years can already have been averaged (s222A(3)).

How is the relief actually given?

The claim is made in the return for the last year in the claim. The profit for that year is adjusted to the averaged figure, and the change in tax and Class 4 National Insurance that would have arisen in the earlier year or years is added to or deducted from the tax due for the last year (BIM84001 and HS224). Earlier years’ returns and liabilities are not reopened. HMRC’s helpsheet warns that tax and National Insurance for earlier years should be paid in full, even if averaging later reduces those profits, or interest may be charged.

For 2025 to 2026, sole traders claim in box 72 of the Self employment (full) pages and partners in box 11 of the Partnership pages. A partner can claim even if the other partners do not. Businesses using Making Tax Digital for Income Tax make the claim through their software instead.

What is the deadline for an averaging claim?

A claim must be made on or before the first anniversary of the normal self assessment filing date for the last year in the claim (ITTOIA 2005 s222(5) and s222A(6)). For a claim covering 2025 to 2026 as the final year, the filing date is 31 January 2027, so the claim must be made by 31 January 2028. That is the same window as amending the return, and shorter than the general four year limit discussed under time limits for tax claims.

If profits for any year in the claim are later adjusted for another reason, for example after an HMRC enquiry, section 225 says the averaging claim is ignored, but a further claim can be made on the adjusted profits. That further claim is in time if made by the first anniversary of the normal filing date for the tax year in which the adjustment is made. HS224 adds that where the return can no longer be amended, the taxpayer should write to HMRC to ask for the adjustment.

When is averaging worth claiming, and what goes wrong?

HMRC’s own guidance (BIM84001) is that averaging will not help someone paying the highest rates of tax and Class 4 National Insurance in every year, but may help someone who pays basic rate in one year and higher rate in another, or whose income falls below their allowances in one year. It is a timing and band equalisation relief, not a deduction, so model the tax both ways before claiming. Class 4 contributions are part of the calculation; see self employed National Insurance.

  • Claiming while on the cash basis, which is not permitted.
  • Trying to use five year averaging for a creative trade, which the legislation does not allow.
  • Including the year the business started or ceased, or the year a partner joined or left.
  • Paying the earlier year’s tax on the averaged figure rather than the original figure, then facing interest.
  • Missing the 22 month deadline because averaging was only considered after the return was filed.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.