Can You Save Tax with Five-Year Farmer’s Averaging?
You should by now have filed, or be the process of preparing, your tax returns for 2016/17. Have you remembered however, that as of 6 April 2016, farmers have the option to average their profits over five years? Two-year averaging is still available, and you can choose which is most beneficial for you – two-year, five-year or no averaging.
This is a valuable relief for those who have experienced fluctuating profits and can result in substantial tax savings.
Example
We can consider this using the example of Farmer Jones, who had the following profits in tax years 2012/13 to 2016/17.
| Tax year | 12/13 | 13/14 | 14/15 | 15/16 | 16/17 |
| Profits | £ | ||||
| Nil (loss) | Nil (loss) | Nil (loss) | 5,000 | 70,000 | |
2 year averaging 15/16 and 16/17
| 37,500 | 37,500 | ||||
| Tax & Class 4 NIC | 7,949.60 | 8,029.60 |
5 year averaging
| 15,000 | 15,000 | 15,000 | 15,000 | 15,000 | |
| Tax & Class 4 NIC | 2,044.50 | 1,764.05 | 1,633.96 | 1,504.60 | 1,424.60 |
The overall tax and class 4 NIC due without averaging is £20,884.60. With two-year averaging it would be £15,979.20 and with five-year averaging, £8,371.71. That is a significant tax saving of £7,607.49 for opting for five-year averaging over two-year, and illustrates the importance of this new relief.
This simple example assumes that Farmer Jones has no other income. You must also ensure that you meet the qualifying criteria before claiming Farmer’s Averaging.
If you’d like any further information please contact Green & Co on 01633 871122.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.
