Q1 Allowances and Adjustments: What to Claim in August 2026

Your Q1 quarterly update is due by 7 August 2026. While most sole traders and landlords focus on getting their income and expenses sorted, there's another crucial layer: allowances and adjustments. Miss these, and you could be overpaying tax or facing problems later when HMRC reviews your submissions.

This guide covers exactly which allowances and adjustments you need to declare in your Q1 update, broken down by whether you're a sole trader, landlord, or both. We'll keep it simple and practical - no tax jargon, just what you need to know to get this right.

The Difference Between Allowances and Adjustments

Before diving into specifics, let's clarify what we're dealing with:

• Allowances - Tax reliefs you can claim to reduce your taxable profit (like capital allowances on equipment)
• Adjustments - Corrections or additions to your basic income and expense figures (like bringing forward losses from previous years)

Both go into your quarterly update alongside your income and expenses. Think of them as the final layer that gives HMRC the complete picture of your tax position for the quarter.

Capital Allowances: Equipment and Asset Purchases

If you bought business equipment, vehicles, or other qualifying assets between 6 April and 5 July 2026, you'll need to claim capital allowances in your Q1 update.

What Qualifies for Capital Allowances

• Computers, laptops, tablets, and software
• Office furniture and equipment
• Tools and machinery for your trade
• Commercial vehicles (with restrictions for cars)
• Plant and equipment for rental properties

Annual Investment Allowance (AIA)

For most purchases, you can claim the full cost immediately under AIA, up to £1 million per year. This means a £2,000 laptop bought in Q1 can reduce your Q1 taxable profit by £2,000.

How to Calculate Your Q1 Capital Allowances

Add up all qualifying purchases made in Q1. In most cases, you can claim 100% of the cost. The only exceptions are:

• Cars (different rules apply based on emissions)
• Items used partly for personal use (claim business proportion only)
• Second-hand purchases from connected parties

Trading Allowance for Sole Traders

If you're a sole trader with low business income, you might be better off claiming the trading allowance instead of deducting actual expenses.

How the Trading Allowance Works

• Automatic £1,000 deduction against your business income
• No need to keep expense records if your gross income is under £1,000
• Can choose between trading allowance or actual expenses (not both)

Should You Use It in Q1?

Only consider the trading allowance if:

• Your total business expenses for the year will be less than £1,000
• You want to simplify your record-keeping
• You're comfortable that this approach won't cost you tax

Remember, you're making this decision for the full tax year, not just Q1. If you use actual expenses in Q1, you can't switch to trading allowance later in the year.

Property Allowance for Landlords

Landlords have their own version: the property allowance. Same principle, different rules.

Property Allowance Basics

• £1,000 automatic deduction against rental income
• Choose between this allowance or actual rental expenses
• Applies to UK rental income only

When It Makes Sense

The property allowance works best for landlords with minimal expenses - perhaps those renting out a single room or a low-maintenance property where actual expenses are small.

For most landlords with mortgage interest, insurance, maintenance costs, and letting agent fees, actual expenses will be much higher than £1,000, making the property allowance irrelevant.

Losses from Previous Periods

If you made a loss in 2025-26 or earlier years, you can often carry these losses forward to reduce your Q1 2026-27 profit.

Types of Losses You Can Carry Forward

• Trading losses - From previous years' business activities
• Property losses - From rental activities (though these are more restricted)
• Capital losses - From asset disposals (only against future capital gains)

How to Use Losses in Q1

You don't have to use all available losses in Q1. You can choose how much to apply, allowing you to:

• Keep some losses for later quarters if you expect higher profits
• Use just enough to reduce your Q1 tax liability to a comfortable level
• Preserve losses if your Q1 profit is already low

If you're not sure about your loss position, check your 2025-26 tax return or speak to whoever prepared it.

Non-Trade Finance Costs

This is a more specialist area that mainly affects landlords, though some sole traders might encounter it.

What Counts as Non-Trade Finance Costs

• Mortgage interest on rental properties
• Loan interest for property investments
• Some types of business loan interest (in specific circumstances)

The Landlord Mortgage Interest Restriction

Since April 2020, landlords can't deduct mortgage interest as a normal expense. Instead, you get basic rate tax relief (20%) as a reduction in your tax bill, not your profit.

In your Q1 update, you'll need to:

• Add back any mortgage interest you've included in expenses
• Report the interest as a non-trade finance cost
• Let the software calculate the actual tax relief

This is complex, but most MTD software handles the calculation automatically once you've entered the figures correctly.

Sole Traders vs Landlords: What's Different

Here's a quick reference for which allowances and adjustments apply to your situation:

Sole Traders Can Claim

• Capital allowances on business assets
• Trading allowance (instead of expenses)
• Trading losses from previous years
• Business loan interest (as normal expense, usually)

Landlords Can Claim

• Capital allowances on rental property equipment
• Property allowance (instead of expenses)
• Property losses from previous years (restricted rules)
• Mortgage interest as non-trade finance cost

Both Sole Traders and Landlords

If you have both business and rental income, you can claim the relevant allowances for each income type. They don't interfere with each other.

However, make sure you're using the right MTD software that can handle both income types properly. We covered this challenge in detail in our guide on mixed income and MTD setup.

Common Mistakes to Avoid

With just days left until the 7 August deadline, here are the mistakes we see most often:

Double-Counting Relief

Don't claim trading allowance and deduct actual expenses. Don't include mortgage interest in both expenses and non-trade finance costs. Pick one method and stick with it.

Missing Capital Allowances

If you bought qualifying assets in Q1, claim the capital allowances in Q1. Don't wait until your annual return - you'll miss out on earlier tax relief.

Applying All Losses Immediately

Think strategically about loss relief. If Q1 is a low-profit quarter anyway, consider saving some losses for busier periods later in the year.

Forgetting About Previous Years

Losses don't expire overnight. If you made losses in 2024-25 or 2025-26, you can usually carry them forward to 2026-27.

Getting Your Numbers Ready

With the 7 August deadline approaching fast, here's how to get organised:

Gather Your Documentation

• Invoices for all Q1 asset purchases
• Your 2025-26 tax return (for loss carryforward figures)
• Mortgage statements (for landlords)
• Any correspondence about previous year losses

Calculate Each Allowance Separately

Work through capital allowances, trading/property allowances, and loss relief as separate exercises. Don't try to bundle everything together - it's easier to make mistakes that way.

Check Your Software Can Handle It

Not all MTD software deals with allowances and adjustments in the same way. Make sure yours can handle your specific situation before you start entering figures.

If you've been following our previous Q1 guides on income and expense reconciliation and sorting out messy records, adding allowances and adjustments is the final step before submission.

What Happens If You Get It Wrong

Mistakes in allowances and adjustments typically fall into two categories:

Under-Claiming (You Pay Too Much Tax)

HMRC won't automatically spot this and give you money back. You'll need to amend your quarterly update or claim the relief in a later quarter.

Over-Claiming (You Pay Too Little Tax)

HMRC's systems are designed to spot this. You'll likely get queries, and may face penalties if the error looks deliberate or careless.

When in doubt, err on the side of caution. You can always claim additional relief later if you find you've missed something.

Final Thoughts

Allowances and adjustments can make a significant difference to your tax bill, but they're often the part of MTD that trips people up. The key is methodical preparation: gather your documentation, work through each type of allowance separately, and don't rush the calculations.

With the 7 August deadline so close, focus on getting the obvious claims right rather than trying to optimise every last detail. You can always refine your approach for Q2 once you've got your first quarterly update safely submitted.

If you're still working through your basic income and expenses, check out our pre-submission checklist to make sure you haven't missed anything else before the deadline.