Q1 Allowances and Adjustments: What to Claim in August 2026

Your Q1 quarterly update is due by 7 August 2026. Alongside income and expenses, many sole traders and landlords wonder where allowances and adjustments fit in: capital allowances, the trading and property allowances, and losses from earlier years. The short answer is that most of them don't go in your Q1 update at all. They are annual adjustments, made once a year before your final declaration.

This guide explains what goes where, so you don't hold up your Q1 submission or claim something in the wrong place.

The Difference Between Quarterly Figures and Annual Adjustments

Under MTD for Income Tax, your figures fall into two groups:

• Quarterly updates - income and expenses by HMRC category for each income source (plus, for landlords, residential finance costs such as mortgage interest, and any rent-a-room income)
• Annual adjustments - capital allowances, the trading allowance, the property allowance, losses brought forward, and accounting adjustments. You enter these once, after the tax year ends and before your final declaration

Equipment: Expense or Capital Allowance?

How you get relief for equipment depends on your accounting basis.

On the cash basis (the default for most sole traders)

Most equipment - laptops, tools, office furniture - is simply an allowable expense when you pay for it. It goes in your quarterly update as an expense, in the quarter you paid. Cars are the exception: claim them through capital allowances (an annual adjustment) or use simplified mileage instead.

On the accruals basis

Equipment goes through capital allowances. For most purchases, the Annual Investment Allowance (AIA) gives full relief for the cost in the year you buy it, up to £1 million a year. You claim it as an annual adjustment, not in your Q1 update.

Landlords

Residential landlords generally can't claim capital allowances on items in a dwelling. Replacing furniture, appliances and furnishings in a furnished let is covered by Replacement of Domestic Items Relief, which is also an annual adjustment.

Trading Allowance for Sole Traders

The trading allowance lets you deduct a flat £1,000 instead of your actual business expenses.

• If your gross trading income is £1,000 or less for the year, it's tax-free
• If it's more, you can deduct £1,000 instead of actual expenses - worth it only if your expenses are under £1,000
• It's one or the other: the allowance or actual expenses, not both
• It applies to the year as a whole and is claimed as an annual adjustment

In your quarterly updates, report your actual income and any expenses you have. If you decide at year end that the trading allowance is better, you make that choice in your annual adjustments.

Property Allowance for Landlords

Landlords have their own version: the £1,000 property allowance. It works the same way - tax-free if gross property income is £1,000 or less, or deducted instead of actual expenses if that is better. You can't use it alongside the 20% mortgage interest credit for the same property income.

For most landlords with insurance, maintenance and letting agent fees, actual expenses are well above £1,000, so the property allowance rarely helps.

Losses from Previous Years

If you made a trading or property loss in 2025-26 or earlier, you can usually carry it forward against profits from the same business. Losses are applied once a year, in your annual adjustments and final declaration, not quarter by quarter. Capital losses can only be set against capital gains.

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

Quick Reference

In your Q1 quarterly update

• Income received in Q1
• Expenses paid in Q1, by category (including equipment on the cash basis)
• Landlords: residential finance costs (mortgage interest) in their own field
• Landlords: rent-a-room income, if you use the scheme

In your annual adjustments (after 5 April 2027)

• Capital allowances (cars, or equipment if you use accruals)
• Trading allowance or property allowance, if you choose them
• Replacement of Domestic Items Relief
• Losses brought forward

Common Mistakes to Avoid

Double-counting relief

Don't claim the trading allowance and deduct actual expenses. Don't include mortgage interest both as an expense and in the finance costs field.

Delaying Q1 to work out allowances

Allowances and losses don't affect your Q1 submission. File Q1 on time and deal with them at year end.

Putting capital items in quarterly expenses on the accruals basis

If you use accruals, equipment goes through capital allowances, not your expenses figures.

What Happens If You Get It Wrong

If you under-claim, HMRC won't spot it for you, so check your annual adjustments carefully before the final declaration. If you over-claim, HMRC may query it, and careless errors can lead to penalties. You can correct quarterly figures in a later update, and you can amend your final declaration within 12 months of the 31 January deadline.

If you've been following our Q1 guides on income and expense reconciliation and sorting out messy records, you're ready to submit Q1. Allowances can wait for year end.

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.