Averaging profits if income fluctuates
Do your profits change dramatically each year? Many self-employed individuals face exactly this challenge. Fortunately, HMRC’s averaging relief may help. Essentially, it regularises tax payments by levelling profits across more than one tax year.
Who can claim
However, only limited groups can claim this relief. For example, farmers and market gardeners qualify. Helpfully, they can average profits over two or five consecutive tax years. Similarly, creators of literary or artistic works also qualify. Specifically, this includes:
- authors
- artists
- composers
Notably, these creators can average profits over two consecutive tax years.
How the relief works
So, what does the relief actually achieve? Primarily, it reduces the impact of unusually high or low profits. Indeed, averaging profits if income fluctuates spreads them across the relevant period. As a result, it may lower the tax you pay. After all, uneven income might otherwise push you into a higher tax band. Likewise, it could affect your National Insurance liabilities.
When it helps most
Now, the relief works best when your tax position differs between years. For instance, imagine paying basic rate tax one year and higher rate the next. In that case, averaging could reduce your bill. Similarly, it may help if your income falls below your personal allowances in one year but is taxable in another.
However, it rarely helps everyone. For example, you might already pay the highest rate of tax every year. Likewise, you might pay Class 4 National Insurance contributions throughout. Then, averaging is unlikely to benefit you.
Important conditions
Nevertheless, some restrictions apply. Firstly, companies cannot claim this relief. Secondly, businesses using the cash basis generally cannot claim either. Additionally, you must meet specific conditions before claiming. In particular, rules govern the level of profit fluctuations between the relevant tax years.
How to make a claim
Fortunately, claiming stays straightforward. You claim through self-assessment for the latest tax year. Therefore, you need not amend earlier tax returns. Instead, HMRC adjusts the tax and National Insurance position for the claim year. Naturally, this reflects the averaging calculation.
How we can help
Do your profits vary considerably from year to year? If you work in a qualifying business, it is worth checking your options. Ultimately, claiming where eligible could reduce your tax bill. Moreover, it gives a fairer reflection of your profits over time. So, contact our team today for tailored advice.
