Year-End Tax Adjustments Under MTD: Capital Allowances, Reliefs and Claims
Last updated: February 2026
Quarterly updates under Making Tax Digital for Income Tax are summaries of income and expenses, not mini tax returns. Capital allowances, loss relief, pension contributions and other tax adjustments are not reported quarterly. They belong in the Final Declaration, the single year-end submission due by 31 January following the end of the tax year. This article explains what you can and cannot include in quarterly updates, how year-end adjustments work under MTD, and the practical steps you need to take before submitting your Final Declaration.
Quarterly updates vs the Final Declaration: the key distinction
Under MTD, you submit four quarterly updates each year through compatible software. Each update reports your total income received and expenses paid during that quarter. The figures are bookkeeping summaries. HMRC uses them to build a running picture of your trading performance, but they are not tax computations.
Your quarterly updates do not include:
- Capital allowances (Annual Investment Allowance, writing-down allowances, first-year allowances)
- Trading loss relief or property loss relief
- Pension contribution deductions
- Charitable giving relief (Gift Aid)
- Overlap relief or basis period adjustments
- Adjustments for private use of business assets
All of these are year-end adjustments. They apply to your full-year position and are calculated, claimed and confirmed when you submit your Final Declaration. This is the point where raw bookkeeping figures become an actual tax computation.
What goes into quarterly updates
Each quarterly update contains categorised totals for the period. Your software submits these to HMRC via the MTD API. The categories map to the existing Self Assessment return boxes, grouped under income and expense headings.
For a self-employed sole trader, a typical quarterly update includes:
- Income: turnover (sales), other business income
- Expenses: cost of goods sold, wages, rent, repairs, travel, advertising, professional fees, phone/internet, insurance, other allowable expenses
For a landlord, the categories cover rental income, mortgage interest (for the basic rate tax reduction calculation), letting agent fees, ground rent, insurance, repairs and maintenance, and other property expenses.
You report the actual amounts received and paid during the quarter. Estimates are permitted if you do not have final figures, provided you correct them in the Final Declaration. There is no requirement to depreciate assets, calculate capital allowances or adjust for private use at the quarterly stage. These are exclusively year-end matters.
Capital allowances under MTD
Capital allowances let you deduct the cost of business assets from your taxable profits. They replace depreciation, which is not an allowable deduction for tax purposes. The main types relevant to sole traders and landlords are:
- Annual Investment Allowance (AIA): 100% deduction on qualifying plant and machinery up to £1,000,000 per year. Covers items such as vans, tools, equipment, computers and office furniture.
- Writing-down allowances (WDA): applied to assets not fully covered by AIA, or when you choose not to claim full AIA. The main rate is 18% per year; the special rate (for integral features and long-life assets) is 6% per year.
- First-year allowances: 100% deduction on specific qualifying items, including zero-emission vehicles and electric charge points.
- Structures and buildings allowance (SBA): 3% per year for qualifying non-residential structures. Relevant mainly to commercial property landlords.
Under MTD, you record the purchase of a capital asset in the quarter you pay for it. Your software logs the expense. But the capital allowance claim itself happens in the Final Declaration. Your software should maintain a capital allowances section where you select which assets to claim, which allowance to apply, and the amount to deduct from profits.
If you buy a £28,000 van in Q2, you record the payment in your Q2 update as a capital expenditure item. You do not claim AIA in Q2. When you reach your Final Declaration, you claim the full £28,000 under AIA, reducing your taxable profit for the year.
Loss relief claims
Trading losses and property losses are calculated on a full-year basis. You cannot claim loss relief in a quarterly update because you need complete annual figures to determine whether you have a loss at all.
The main options for trading losses are:
- Carry forward: set the loss against future profits from the same trade
- Sideways relief: set the loss against other income in the same tax year (subject to restrictions)
- Carry back: set the loss against profits of the previous tax year
- Early years relief: for losses in the first four years of a new business, carry back up to three years
Your Final Declaration is where you make these elections. Your software should present the loss relief options once it calculates your full-year position. If you have a trading loss and property income, or vice versa, the interaction between the two determines your best claim. Getting this right requires the complete picture, which is only available after Q4.
Pension contributions and other personal reliefs
Personal pension contributions receive tax relief at your marginal rate. Under Self Assessment, you claim this on the tax return. Under MTD, you claim it in the Final Declaration. Pension contributions are not a business expense, so they do not appear in quarterly updates at all.
The same applies to:
- Gift Aid donations: charitable donations qualifying for Gift Aid extend your basic rate band. Claimed in the Final Declaration.
- Married couple’s allowance / marriage allowance: transferable allowances between spouses. Confirmed at year end.
- Finance cost restriction: for residential landlords, mortgage interest relief is restricted to the basic rate (20%). The calculation applies to the full year and is finalised in the Final Declaration.
None of these reliefs interact with quarterly reporting. Your software handles them as year-end adjustments when you prepare your Final Declaration.
How year-end adjustments work in practice
When your Q4 update is submitted (deadline: 7 May following the end of the tax year), your software holds twelve months of income and expense data. The Final Declaration process then follows these steps:
- Review quarterly figures: check each quarter for errors, estimates that need correcting, and any missing transactions. Your software lets you amend quarterly figures before finalising.
- Add capital allowances: review your asset register. Decide which allowances to claim on each asset. Your software calculates the deduction and reduces your taxable profit.
- Apply loss relief: if your adjusted profit is a loss, choose how to use it (carry forward, sideways, carry back). If you have losses brought forward from a previous year, set them against this year’s profit.
- Enter personal reliefs: input pension contributions, Gift Aid donations, and any other personal allowances or deductions.
- Confirm and submit: your software calculates your total taxable income, applies the tax rates, and presents the Final Declaration for you to review. You (or your accountant) confirm the figures and submit to HMRC.
The deadline for the Final Declaration is 31 January following the tax year end. For the 2026/27 tax year, that means 31 January 2028. Unlike quarterly updates, the Final Declaration has no soft-landing protection in the first year. A late Final Declaration incurs penalty points immediately.
Worked example: year-end adjustments for a plumber
Tom is a self-employed plumber in Leeds with qualifying income above £50,000, bringing him into MTD from 6 April 2026. Here is how his year-end adjustments work for 2026/27.
Quarterly update totals (full year)
| Category | Amount |
|---|---|
| Total turnover (income) | £72,000 |
| Materials and parts | £11,400 |
| Vehicle running costs (fuel, insurance, servicing) | £4,800 |
| Tools and equipment (under £500 each) | £1,200 |
| Phone and internet | £960 |
| Accountancy fees | £1,500 |
| Other expenses (insurance, advertising) | £2,140 |
| Total expenses from quarterly updates | £22,000 |
Tom’s quarterly figures show a profit of £50,000. But this is before year-end adjustments.
Year-end adjustments in the Final Declaration
| Adjustment | Details | Effect on taxable profit |
|---|---|---|
| Capital allowance: van | Bought a £24,000 van in September 2026. Claims AIA in full. | −£24,000 |
| Private use adjustment: van | Uses the van 30% for personal journeys. Must reduce AIA by 30%. | +£7,200 |
| Capital allowance: pipe-bending machine | Bought for £3,500 in January 2027. Claims AIA in full. | −£3,500 |
| Loss relief brought forward | £4,000 trading loss carried forward from 2025/26 (first years of trade). | −£4,000 |
| Pension contributions | Paid £6,000 into a personal pension. Tax relief at marginal rate. | −£6,000 |
| Total year-end adjustments | −£30,300 |
Final taxable profit
| Step | Amount |
|---|---|
| Profit before adjustments (from quarterly updates) | £50,000 |
| Capital allowances (van net of private use + machine) | −£20,300 |
| Loss relief brought forward | −£4,000 |
| Adjusted trading profit | £25,700 |
| Pension contributions (extends basic rate band) | −£6,000 |
| Taxable income for tax calculation | £25,700 |
Tom’s pension contributions of £6,000 actually extend his basic rate band rather than reducing taxable income directly, but the effect is that £6,000 of income that would have been taxed at a higher rate is instead taxed at basic rate. His software handles this calculation automatically and presents the correct tax liability in the Final Declaration.
Without year-end adjustments, Tom would have been taxed on £50,000 of profit. With them, his adjusted profit drops to £25,700. The £24,300 difference demonstrates why the Final Declaration is the most important submission of the year.
Common mistakes to avoid
Several errors come up repeatedly in year-end MTD submissions:
- Claiming capital allowances quarterly: your software may let you enter capital expenditure in a quarterly update, but do not confuse recording the purchase with claiming the allowance. The allowance is a Final Declaration adjustment.
- Forgetting private use adjustments: if a van, phone or other asset is used partly for personal purposes, the capital allowance must be reduced proportionally. HMRC expects a reasonable apportionment based on actual usage.
- Missing the pension deadline: to claim tax relief on pension contributions for 2026/27, payments must be made by 5 April 2027. Contributions paid after that date belong to the following tax year.
- Not correcting quarterly estimates: if you estimated figures in quarterly updates, you must correct them in the Final Declaration. Leaving incorrect estimates will create discrepancies that HMRC may query.
- Assuming quarterly profit equals taxable profit: the quarterly profit figure does not include capital allowances or personal reliefs. It is a cash-basis or accruals-basis bookkeeping total, not a tax computation.
Preparing for year-end adjustments now
Even though capital allowances and reliefs are claimed at year end, preparation starts much earlier. Throughout the year, you should:
- Maintain an asset register in your software listing every capital purchase, its cost, date and intended business-use percentage
- Keep receipts and invoices for all capital expenditure
- Track pension contributions as you make them, noting gross and net amounts
- Record any Gift Aid donations with confirmation receipts
- Monitor your cumulative quarterly profit so you can anticipate your year-end tax position and plan allowance claims accordingly
Your MTD software should support asset tracking and year-end adjustment calculations. If it does not, you may need a separate capital allowances module or the help of an accountant to prepare your Final Declaration correctly.
Frequently asked questions
- Can I claim capital allowances in a quarterly update?
- No. Quarterly updates report income and expenses only. Capital allowances are calculated on a full-year basis and claimed in the Final Declaration, which is due by 31 January following the end of the tax year.
- What happens if I buy an asset in Q1 but do not submit my Final Declaration until January?
- The purchase is recorded in your Q1 update as a capital expenditure item. The capital allowance claim is made when you submit your Final Declaration. The timing of the purchase within the tax year does not affect the allowance amount, only the tax year in which the expenditure falls matters.
- Do I need to calculate capital allowances myself?
- Most MTD-compatible software includes capital allowance calculation tools. You enter the asset details (cost, type, business-use percentage) and the software calculates the available allowances. However, for more involved claims such as structures and buildings allowance or interaction with loss relief, professional advice from a qualified accountant is recommended.
- Can I carry a trading loss forward under MTD?
- Yes. Loss relief rules have not changed under MTD. If your adjusted trading profit for the year is a loss, you can carry it forward against future profits from the same trade. You can also claim sideways relief or carry back, subject to the normal restrictions. The election is made in your Final Declaration.
- Are the year-end adjustment rules different under MTD compared to Self Assessment?
- No. The underlying tax rules for capital allowances, loss relief, pension contributions and other reliefs are identical. MTD changes how you report your income and expenses (quarterly digital updates instead of one annual return), but the year-end tax computation follows the same legislation. The Final Declaration is effectively the MTD equivalent of the Self Assessment tax return.
Need help with your MTD year-end adjustments?
Jack Ross Chartered Accountants prepares Final Declarations for sole traders and landlords, ensuring every capital allowance, loss relief claim and pension deduction is correctly applied. As a Manchester-based firm with over 75 years’ experience, we handle the year-end calculations so you can focus on running your business. Book a consultation
