The answer depends on how averaging relief was reported in the 2024/25 Self Assessment return. The rules differ for those filing as individuals and those filing as partners. This article sets out which rules apply, where the distinction lies, and what action is needed.
Key Highlights
- Individuals filing via SA103 receive an automatic MTD for Income Tax averaging relief exemption for 2026/27 while partners filing via SA104 do not
- Partners must apply for exemption regardless of whether the SA104 claim was made in 2024/25 or is expected in a future year
- MTD for Income Tax does not apply to partnerships as entities, only to individual partners whose own qualifying income exceeded £50,000 in 2024/25
- HMRC processes exemption applications within 28 days; apply no later than early July 2026 to meet the 7 August quarterly deadline
What is Averaging Relief?
Averaging relief allows farmers, market gardeners, and creators of literary or artistic works to smooth fluctuating profits across either two or five tax years, reducing the income tax and National Insurance contributions payable in years of unusually high profit.
Individuals whether farming, market gardening, or creating literary or artistic works use the SA103 supplementary page. Partners reporting their share of partnership income use the SA104 supplementary page.
Example
A farmer records a profit of £20,000 in 2023/24 and £90,000 in 2024/25, a total of £110,000 across both years.
Without Averaging
Header | 2023/24 | 2024/25 | Combined |
|---|---|---|---|
Profit | £20,000 | £90,000 | £110,000 |
Personal allowance | (£12,570) | (£12,570) | Cell |
Taxable income | £7,430 | £77,430 | Cell |
Basic rate tax at 20% | £1,486 | £7,540 | Cell |
Higher rate tax at 40% | - | £15,892 | Cell |
Total income tax | £1,486 | £23,432 | £24,918 |
With Averaging
Header | 2023/24 | 2024/25 | Combined |
|---|---|---|---|
Averaged Profit | £55,000 | £55,000 | £110,000 |
Personal allowance | (£12,570) | (£12,570) | Cell |
Taxable income | £42,430 | £42,430 | Cell |
Basic rate tax at 20% | £7,540 | £7,540 | Cell |
Higher rate tax at 40% | £1,892 | £1,892 | Cell |
Total income tax | £9,432 | £9,432 | £18,864 |
Tax saving across both years: £6,054
These figures assume no other income, standard personal allowance, and 2025/26 income tax rates and bands applied to both years for illustrative purposes. Actual savings depend on individual circumstances.
Who is Automatically Exempt from MTD Through Averaging Relief?
Individuals who claimed averaging relief using the SA103 in their 2024/25 Self Assessment return are automatically exempt from MTD for Income Tax for 2026/27. No application or contact with HMRC is needed. This applies whether the claim relates to farming, market gardening, or the creation of literary or artistic works.
Taxpayer type | Averaging relief situation | Prompted Disclosure |
|---|---|---|
Individual | Claimed averaging relief in 2024/25 | Automatic. No action needed |
Individual | Did not claim in 2024/25 but expects to claim in 2025/26 or 2026/27 | Must apply to HMRC |
Partner | Claimed averaging relief in 2024/25 | Must apply to HMRC |
Partner | Did not claim in 2024/25 but expects to claim in 2025/26 or 2026/27 | Must apply to HMRC |
Partner | Qualifying income below £50,000 in 2024/25 | Not in scope. No action needed |
These exemptions are temporary. From the 2027/28 tax year, MTD for Income Tax will apply to individuals whose qualifying income exceeded £30,000 in 2025/26. From April 2028 a further phase brings in those with qualifying income of £20,000 or more in 2026/27.
Who Must Apply for an Averaging Relief Exemption?
MTD for Income Tax does not apply to partnerships as entities. HMRC has confirmed partnerships are currently exempt and will set out a separate timeline in due course. The MTD question arises at the level of the individual partner. A partner is in scope of MTD for 2026/27 only where their own qualifying income from sole trades and UK property businesses held in their personal name exceeded £50,000 in the 2024/25 tax year. Partnership income itself is not the trigger. Where a partner's qualifying income falls below that threshold, no exemption application is needed because they are not in scope at all.
What Does "Reasonably Expects to Claim" Mean in Practice?
The standard is intentionally practical rather than prescriptive. A farmer with volatile profits who has used averaging relief in previous years, or whose current year results already point toward a significant swing, has a reasonable basis for expecting to make a claim. The test is forward-looking and based on the taxpayer's own assessment of their likely position not a guarantee that the relief will ultimately be needed.
This matters because the exemption question does not disappear simply because averaging was not needed in 2024/25. Any taxpayer with inherently unpredictable income should consider whether the reasonable expectation test applies even in years where a claim is ultimately not made.
How to Apply & What Happens Without an Exemption?
Applications are made through GOV.UK using the online exemption application for MTD for Income Tax. HMRC aims to process applications within 28 days. Anyone needing an exemption confirmed before the first quarterly update deadline of 7 August 2026 should apply no later than early July 2026.
A taxpayer who is in scope and has neither an automatic exemption nor an approved application is subject to the following MTD obligations for 2026/27:
- Keep digital records for each qualifying income source using MTD-compatible software
- Submit quarterly updates to HMRC for each qualifying source
- File the 2026/27 year-end return through MTD-compliant software
For 2026/27 only, no penalty points will be issued for missed quarterly update deadlines. The obligation to keep digital records and submit quarterly updates still applies, but late submission will not trigger points this year. The soft landing does not extend to the Final Declaration, due 31 January 2028.
From 2027/28 onwards the full points-based penalty regime applies. Each missed submission accumulates one point; four points triggers a £200 penalty, with a further £200 for each subsequent missed submission at that threshold.
Conclusion
The 2026/27 tax year is the first in which MTD for Income Tax is live. For most farmers and market gardeners the exemption position is unambiguous once the SA103 and SA104 distinction is understood. The risk is on assumption. A partner who assumed exemption was automatic, or a farmer who assumed the question did not arise because averaging was not needed last year, may already be in scope without realising it. The first quarterly deadline is 7 August 2026 and HMRC takes 28 days to process applications. The time to check is now, not after that deadline has passed.
If you are unsure whether MTD for Income Tax applies to your position for 2026/27, or need help making an exemption application, our specialist team can assess your qualifying income and manage the process on your behalf.
How UKPA Can Help?
At UK property accountants, we guide landlords through every step of software setup, digital record keeping, quarterly updates and final declaration submissions, ensuring a seamless transition and compliance.
Frequently Asked Questions
No. Averaging relief does not reduce total profits. It redistributes them across two or five tax years to smooth the income tax burden. The total taxable profit across the averaged years remains unchanged. The benefit is a reduction in higher-rate tax exposure in peak years, as the worked example in this article illustrates.
Yes. Claiming averaging relief does not automatically remove the MTD obligation for everyone. Individuals filing via SA103 receive automatic exemption for 2026/27. Partners filing via SA104 must apply separately. If a partner's exemption application is not approved before the first quarterly deadline of 7 August 2026, MTD obligations apply in full.
If your profits change after you make an averaging claim, the claim is treated as never having been made. A further averaging claim can be made on or before the first anniversary of the normal self-assessment filing date for the tax year in which the adjustment is made. Where the amendment window for the relevant tax return remains open, a revised claim can be made by amending the return. Where the window has expired, you should write to HMRC requesting the necessary adjustments. Time limits apply so prompt action is essential.
No. The soft landing for 2026/27 suspends penalty points for missed quarterly update deadlines only. The obligation to keep digital records using MTD-compatible software applies from the start of the tax year regardless. Failure to maintain digital records is a separate compliance risk not covered by the soft landing.
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