Farmers' Profit Averaging Relief Explained (2026/27)
How farmers can average trading profits over two or five years to smooth out volatile harvests and prices, reducing the higher-rate Income Tax spikes that uneven profits can cause.
Why Farm Profits Need Smoothing
Arable, livestock and horticultural profits are unusually volatile — a bumper harvest can be followed by a washout year, and commodity prices move independently of a farmer's own effort. Because UK Income Tax is charged year by year, a single very good year taxed on its own can push a chunk of profit into the higher-rate band, even though the farmer's average income over several years is much lower. Averaging relief exists specifically to correct for that.
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Model self-employed farming profit and taxHow Two-Year and Five-Year Averaging Work
- Two-year averaging: compares the profits of the current and previous tax year. If the lower year's profit is significantly below the higher year's, the two profits are averaged and the tax recalculated for both years using the averaged figure, generally full relief is due where the fluctuation is large enough, and partial relief in a narrower band — always check the current HMRC thresholds, as this detail changes and is easy to get wrong.
- Five-year averaging (available from 2016/17): compares profits over a rolling five-year window using its own volatility test, giving farmers a second, broader smoothing option on top of two-year averaging.
What Averaging Does Not Change
Averaging only affects the Income Tax calculation on trading profits. It does not change:
- Class 4 National Insurance, which is still calculated on the actual profit of each individual tax year.
- The underlying accounts or the profit figure reported for other purposes.
Sources
Frequently asked questions
What is farmers' averaging relief?
It lets a self-employed farmer (or market gardener) average their trading profits over either two or five consecutive tax years for Income Tax purposes, smoothing out the effect of a very good year followed by a very poor one, which can otherwise push part of a good year's profit into higher-rate tax unnecessarily.
Who can claim farmers' averaging relief?
Sole traders and partners carrying on a trade of farming or market gardening in the UK. It is not available to farming companies, which are taxed under Corporation Tax rules rather than Income Tax.
How much do profits need to fluctuate to qualify?
For two-year averaging, full relief is available if the lower year's profit is less than 75% of the higher year's; partial relief applies for a fluctuation between 75% and 70%. Five-year averaging has its own separate volatility test. Always check the current HMRC criteria, as the precise fluctuation bands are a detailed area.
How is the claim actually made?
Averaging is claimed through the Self Assessment tax return, normally within the standard time limit after the relevant tax year, and HMRC then recalculates the tax due for the affected years based on the averaged profit figure rather than the actual year-by-year profits.
Does averaging affect National Insurance as well as Income Tax?
Averaging relief applies to Income Tax on trading profits. Class 4 National Insurance is calculated on actual profits for each tax year in the normal way, not the averaged figure, so the NI position is unaffected by an averaging election.
Can averaging be used every year?
Yes, in principle a farmer can make an averaging claim in any qualifying year, and five-year averaging (introduced for tax years from 2016/17 onwards) can in some cases run alongside or instead of two-year averaging, so it is worth reviewing the position with an accountant most years given how variable farm profits typically are.
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