Question: I’m a dairy farmer and have been using income averaging for the past few years to help balance out a particularly strong earning year. However, I’m now facing sky-high tax bills, and between income tax and preliminary tax, I feel under real financial pressure.
What should I be doing to manage my tax better? Should I be reconsidering income averaging, or are there other reliefs or planning methods I should explore to ensure I’m paying tax in the smartest way possible? Any advice would be greatly appreciated.
Answer: This is a dilemma faced by many. Income averaging is often a good way to smooth out the highs and lows of farming income, but when a few strong years stack up, the tax bills can start to feel relentless. Between preliminary tax and balancing the books, it’s easy to feel overwhelmed.
The good news is, with a bit of planning and the right approach, there are ways to take control of the situation.
Preliminary tax
Let’s start with preliminary tax, as this is where many farmers feel the biggest squeeze. You’ve got two main options: either pay 90% of your current year’s tax bill or base it on 100% of the previous year’s liability.
If last year was a particularly strong year but this year has been quieter, opting for the 90% route could save you a significant chunk up front. But be cautious – it requires good estimates and accurate records. If your figures are off, you could face interest charges later.
On the other hand, the 100% option provides certainty. You know what you’re paying, and there’s no risk of underpayment penalties. But, of course, that certainty can come at the cost of overpaying if your profits have dipped. It’s worth sitting down with your accountant to weigh up which option suits your situation best.
Income averaging itself is another thing to consider. While it works well for many, it’s not always the right fit, particularly if your income has stabilised or dropped.
Opting out for a year can provide relief, but keep in mind that the deferred tax will still need to be paid in future years. It’s not a decision to rush into, but for some farmers, it can be a lifesaver during tough cashflow periods.
Let’s now turn to your concerns around cashflow and feeling financially squeezed. One of the simplest ways to reduce the pressure is to spread your tax payments across the year.
Revenue’s Direct Debit Instalment Scheme is a good option for this, allowing you to pay smaller amounts monthly rather than facing one big bill at the end of the year.
Alternatively, if your income is seasonal, making ad hoc payments when the money comes in can ease the burden, for example, after a good cattle sale or harvest.
Another practical step is to build a tax reserve. It’s easier said than done, but setting aside 20-30% of your profits as you earn them can make a big difference when the tax bill arrives.
Some farmers find it helpful to open a separate account for tax money. It keeps it out of sight and out of mind until it’s needed.
Tax reliefs
Tax reliefs are also your friend here. Make sure you’re claiming everything you’re entitled to, from stock relief to capital allowances on machinery and sheds.
If you’re farming in a partnership, there are often additional tax advantages to explore.
And if you’re planning big investments, think carefully about timing. In leaner years, it might make sense to defer non-essential purchases until your cashflow improves.
Finally, don’t be afraid to talk to Revenue if you’re struggling. They’re more understanding than many people think, especially if you approach them early and show you’re making an effort to manage your liabilities.
Payment plans can often be arranged, and it’s far better to have that conversation up front than to let the stress build.
Managing tax is never easy, especially in a sector as unpredictable as farming. But with a bit of forward planning and the right advice, you can ease the pressure and keep things on track.
Marty Murphy is head of tax at ifac, which is the professional services firm for farming, food and agri-businesses.
Choose wisely between paying 90% of the current year’s tax or 100% of last year’s liability.Income averaging – stay or opt out? Opting out for a year may ease cashflow but requires careful planning.Spreading tax payments: Consider Revenue’s Direct Debit Instalment Scheme or making ad hoc payment.Building a tax reserve: Setting aside 20-30% of profits can prevent financial strain when tax bills arrive.Maximising tax reliefs: Claim all reliefs and time major investments strategically for better tax efficiency.
Question: I’m a dairy farmer and have been using income averaging for the past few years to help balance out a particularly strong earning year. However, I’m now facing sky-high tax bills, and between income tax and preliminary tax, I feel under real financial pressure.
What should I be doing to manage my tax better? Should I be reconsidering income averaging, or are there other reliefs or planning methods I should explore to ensure I’m paying tax in the smartest way possible? Any advice would be greatly appreciated.
Answer: This is a dilemma faced by many. Income averaging is often a good way to smooth out the highs and lows of farming income, but when a few strong years stack up, the tax bills can start to feel relentless. Between preliminary tax and balancing the books, it’s easy to feel overwhelmed.
The good news is, with a bit of planning and the right approach, there are ways to take control of the situation.
Preliminary tax
Let’s start with preliminary tax, as this is where many farmers feel the biggest squeeze. You’ve got two main options: either pay 90% of your current year’s tax bill or base it on 100% of the previous year’s liability.
If last year was a particularly strong year but this year has been quieter, opting for the 90% route could save you a significant chunk up front. But be cautious – it requires good estimates and accurate records. If your figures are off, you could face interest charges later.
On the other hand, the 100% option provides certainty. You know what you’re paying, and there’s no risk of underpayment penalties. But, of course, that certainty can come at the cost of overpaying if your profits have dipped. It’s worth sitting down with your accountant to weigh up which option suits your situation best.
Income averaging itself is another thing to consider. While it works well for many, it’s not always the right fit, particularly if your income has stabilised or dropped.
Opting out for a year can provide relief, but keep in mind that the deferred tax will still need to be paid in future years. It’s not a decision to rush into, but for some farmers, it can be a lifesaver during tough cashflow periods.
Let’s now turn to your concerns around cashflow and feeling financially squeezed. One of the simplest ways to reduce the pressure is to spread your tax payments across the year.
Revenue’s Direct Debit Instalment Scheme is a good option for this, allowing you to pay smaller amounts monthly rather than facing one big bill at the end of the year.
Alternatively, if your income is seasonal, making ad hoc payments when the money comes in can ease the burden, for example, after a good cattle sale or harvest.
Another practical step is to build a tax reserve. It’s easier said than done, but setting aside 20-30% of your profits as you earn them can make a big difference when the tax bill arrives.
Some farmers find it helpful to open a separate account for tax money. It keeps it out of sight and out of mind until it’s needed.
Tax reliefs
Tax reliefs are also your friend here. Make sure you’re claiming everything you’re entitled to, from stock relief to capital allowances on machinery and sheds.
If you’re farming in a partnership, there are often additional tax advantages to explore.
And if you’re planning big investments, think carefully about timing. In leaner years, it might make sense to defer non-essential purchases until your cashflow improves.
Finally, don’t be afraid to talk to Revenue if you’re struggling. They’re more understanding than many people think, especially if you approach them early and show you’re making an effort to manage your liabilities.
Payment plans can often be arranged, and it’s far better to have that conversation up front than to let the stress build.
Managing tax is never easy, especially in a sector as unpredictable as farming. But with a bit of forward planning and the right advice, you can ease the pressure and keep things on track.
Marty Murphy is head of tax at ifac, which is the professional services firm for farming, food and agri-businesses.
Choose wisely between paying 90% of the current year’s tax or 100% of last year’s liability.Income averaging – stay or opt out? Opting out for a year may ease cashflow but requires careful planning.Spreading tax payments: Consider Revenue’s Direct Debit Instalment Scheme or making ad hoc payment.Building a tax reserve: Setting aside 20-30% of profits can prevent financial strain when tax bills arrive.Maximising tax reliefs: Claim all reliefs and time major investments strategically for better tax efficiency. 
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