Trading losses

Overview

If you are self-employed or a partner in a partnership, you will make a loss in your business whenever your allowable expenses and capital allowances are more than your sales income or turnover for your accounting period.

You work out your loss the same way as you work out your profits for the year, using either the accruals basis or cash basis.

If you have more than one trade, each one is considered separately for loss relief purposes. This means you can choose to use one loss relief for one trade and a different loss relief for a second trade. The interactions are complex, though, so you may wish to seek further help with this.

Interaction with trading allowance

If you are considering using the trading allowance but have made trading losses then it may be more beneficial not to claim the trading allowance and claim your actual expenses instead, and then claim tax relief for your trading losses too.

How the tax relief works

Remember that when we refer to a tax year, we are talking about the year ended on 5 April – so 2023/24 is the tax year ended 5 April 2024.

Tax relief is given by:

• offsetting a loss arising in a tax year against other taxable income and, in some circumstances, capital gains, in either the same or a different tax year, so that
• the amount of income or capital gains that is taxable is lower than it would be if the loss was not set off against it.

The income tax due (or capital gains tax, as the case may be) is then calculated on the taxable income (or gain) after the amount of the loss is deducted. This means that less tax is payable than would otherwise be the case. In some circumstances a refund of tax already paid (for example tax deducted under PAYE) may be due.

There are several different ways in which tax relief for losses can be given. We look at each one under the heading Tax relief for losses below, explaining the qualifying criteria and using examples, to help you decide what method of relief to claim. There are different time limits for each claim and they are usually strictly applied.

A summary of each loss relief claim, including which accounting basis you need to use and the time limit for making the claim, is given under the heading Key features of loss relief claims below.

  Please note that for losses arising in the 2024/25 tax year onwards, it doesn’t matter whether you prepare your accounts using the cash basis or the accruals basis, you can still claim relief under ANY method of loss relief.

In all cases, the loss must have been created by a self-employment which is genuinely being carried on with a view to making a profit. Losses arising from a hobby will not qualify for loss relief.

There is a cap on the amount of income tax relief that an individual can benefit from. This limit or cap restricts the amount of loss relief an individual can claim. The maximum relief an individual can claim is usually the greater of £50,000 and 25 per cent of their annual income. This cap does not apply to losses used against profits of the same trade. If you spend less than 10 hours per week working for your business, then your loss relief may be restricted further to £25,000.

For the 2020/21 and 2021/22 tax years the cap was increased to £2,000,000 when using the extended carry back rules. Extended carry back loss relief is outlined below under Tax relief for losses.

You usually make a claim for loss relief on your self assessment tax return. You will need to complete the self-employment (short) tax return pages (page 2), or the self-employment (full) pages (page 4) to claim the loss.

A standalone loss claim can be made in some circumstances by writing a letter to HM Revenue & Customs (HMRC) with the relevant information provided you are within the appropriate time limits. You can find out more information in HMRC's Helpsheet HS227 on losses.

Tax relief for losses

There are five different ways in which tax relief for losses can be obtained. Most can apply at any stage of the life of a self-employed business, but some apply when it is just starting up or when it is stopping permanently. 

There was also a temporary measure introduced in April 2022 to provide another method for obtaining tax relief for losses arising in the 2020/21 and 2021/22 tax years only, being the years affected by the covid pandemic. These extended carry back loss relief provisions allowed you to offset at least some of the loss against trading profits in a previous tax year in certain circumstances. This reduced the tax due for the tax year in which the loss was offset, so a repayment of tax usually arose. The claim for the 2021/22 tax year had to be made by 31 January 2024 in most cases.

We now look in detail at the five main methods of loss relief below.

Set loss off against other income

You can set the loss from your self-employment against your other taxable income in the same tax year in which you made the loss and/or the tax year prior to that in which you made the loss. This reduces the tax that would otherwise be payable on your other income. This is sometimes known as sideways loss relief.

For losses arising in the 2023/24 tax year or earlier, the loss must have been calculated using the accruals basis of accounting. Losses arising in 2024/25 onwards can be calculated using either the cash basis or the accruals basis. 

You cannot choose how much of the loss to use. All of it is set against your other income until either the loss is completely used up or there is no income left. This means that you may not be able to fully use certain reliefs such as your personal allowance.

Set loss off against capital gains

You can set the loss from your self-employment against capital gains in the same tax year in which you made the loss and/or the tax year prior to that in which you made the loss. However, you must offset the loss against any other income in the tax year first (before setting it off against capital gains). So, you can only set a self-employment loss against a capital gain to the extent the amount of the loss exceeds the other income in the tax year.

For losses arising in the 2023/24 tax year or earlier, the loss must have been calculated using the accruals basis of accounting. Losses arising in 2024/25 onwards can be calculated using either the cash basis or the accruals basis. 

This method of loss relief is only likely to be beneficial if there is no other income in the tax year in which the loss is used, so the loss can just be offset against any capital gain and no personal allowance is ‘wasted’.

Set loss off against profits in a future tax year

You can carry forward a loss and offset it against profits of the same self-employment in a future year. This is generally the default position if the loss cannot be used in any other way. This is likely to reduce the tax that would otherwise be due in a future tax year.

The loss must be used as soon as possible, so in the first tax year after the loss-making year in which you make a profit. If it is not all used in one tax year, any balance is carried forward to the next tax year in which there is a profit.

The loss can be calculated using either the accruals basis or cash basis of accounting.

For new businesses, set loss off against income from previous years

For a new self-employment business, if the loss occurs in any of the first four tax years of trading you can set it against your total taxable income of the three tax years immediately before the loss year, starting with the income of the earliest year first. This reduces the tax due on this income, and a repayment of tax is usually generated.

For losses arising in the 2023/24 tax year or earlier, the loss must have been calculated using the accruals basis of accounting. Losses arising in 2024/25 onwards can be calculated using either the cash basis or the accruals basis.

To see how this kind of loss relief works it is best to look at an example.

Offsetting losses when a business ends

If your self-employment business finishes and you make a loss in your final 12-month period, you can set this against trading profits of the previous three tax years, latest year first. This reduces the tax due on this income, and a repayment of tax is usually generated.

The loss can be calculated using either the cash basis or the accruals basis of accounting.

Interaction with capital allowances

If you are entitled to capital allowances, when you deduct them from your trading income after deducting other expenses you might create a loss, or it might mean that an existing loss becomes a bigger loss. When considering what loss relief to claim you should bear in mind that in some circumstances it might be beneficial for you not to claim capital allowances in the year of a loss but to claim them in a later year. This is because you might not always get additional tax savings from claiming the capital allowances for loss purposes too. This can be seen in the example below.

Key features of loss relief claims

The key features of the different loss relief claims are summarised below, including the accounting basis required and time limit for claims.

Setting the loss against all of your income in the same year

Accounting basis

Accruals basis only for losses in tax years up to and including 2023/24. For 2024/25 onwards the loss can be calculated on either the accruals basis or the cash basis.

Time limit

Claim within one year from 31 January after the end of the loss-making tax year.

For example, if a trader made a loss for the 2023/24 tax year. They will need to make a claim by 31 January 2026.

Top tips

  Be careful when using this loss relief because you cannot choose how much of the loss to use. All of it is set against your other income until there is either no loss or no income left. This means that you may not get the benefit of other tax reliefs such as your personal allowance.

Setting the loss against all of your income from the previous year

Accounting basis

Accruals basis only for losses in tax years up to and including 2023/24. For 2024/25 onwards the loss can be calculated on either the accruals basis or the cash basis.

Time limit

Claim within one year from 31 January after the end of the loss-making tax year.

For example, if a self-employed trader made a loss for the 2023/24 tax year. They will need to make a claim by 31 January 2026.

Top tips

  If you have more losses than your income in the current and previous tax years then you can decide to claim loss relief in both the current year and carry back to the previous tax year, however you need to decide which claim is to be made first. The fact that you are claiming the relief in more than one tax year means that you are wasting personal allowances in at least one of those years.

Setting the loss against total income of the three tax years immediately before the loss year, earliest year first

Accounting basis

Accruals basis only for losses in tax years up to and including 2023/24. For 2024/25 onwards the loss can be calculated on either the accruals basis or the cash basis.

Time limit

Claim within one year from 31 January after the end of the loss-making tax year.

For example, if a self-employed trader made a loss for the 2023/24 tax year. They will need to make a claim by 31 January 2026.

Special circumstances

For new businesses – if the loss occurs in any of the first four years of trading.

Top tips

  You may lose some or all of your personal allowance as this loss relief goes against your total income. If you claim this relief over more than one tax year you will lose at least all of one tax year’s personal allowance.

Carrying forward the loss to use against future profits of the same trade

Accounting basis

Accruals basis or cash basis

Time limit

Claim within four years from the end of the loss-making tax year.

So, if self-employed and made a loss in the 2023/24 tax year. You will need to make a claim by 5 April 2028.

Top tips

  For losses in tax years up to and including 2023/24, the cash basis rules restrict how you can utilise trading losses. From 2024/25 onwards, the restrictions no longer apply.

Setting the loss against trading profits of the previous three years, latest year first

Accounting basis

Accruals basis or cash basis

Time limit

Claim within four years from the end of the tax year the business ceased trading.

For example, if a trader made a loss and stopped trading during the 2023/24 tax year. They will need to make a claim by 5 April 2028.

Special circumstances

Your business ceases to trade and you make a loss in your last 12 months.

Top tips

  Terminal loss relief claims can be very complex as you may need to take into account overlap relief.

National Insurance relief for losses

This will depend on which way you choose to get income tax relief for the loss. If you choose to use a relief which means you offset a loss against trading profits of either the same or a different tax year, then you may automatically get National Insurance relief too. But if you choose to offset your loss against a different type of income such as employment income then you will not get any National Insurance relief at the same time.

Losses and means-tested benefits

Tax credits

In a number of situations, the way you get tax relief for losses you make in your business will be very different from the tax credit rules for using the same losses. In particular there are three areas where you need to bear this in mind. We refer to the normal income tax rules for loss relief as ‘real tax’ to distinguish them from the rules for tax credits loss relief.

Carry back of losses

For real tax, you may want to carry back your losses so that you can get a tax repayment in respect of the previous tax year.

However, you will need to remember that for tax credits, it is not possible to re-open claims for the previous year to take into account any losses you subsequently carry back from the current year. There is no carry-back of losses for tax credits.

Losses that you have for real tax purposes may still be set off against your tax credits income. If you have any additional income to be taken into account for tax credit purposes, this will first be done by setting the loss against the income you have in the year of loss. If you are a member of a couple and have a joint claim with your spouse, civil partner or someone with whom you are living, you must set off your losses against your joint (household) income for the tax year of the loss. Any surplus can be carried forward and set against income of the same trade for the next tax year.

Carry forward of trading losses

For both real tax and tax credits, losses, which are not set off in any other way are carried forward and set against future profits of the same trade. However, the amount carried forward will often differ for income tax and for tax credits.

This is primarily for two reasons:

1. Where the person running the business is part of a couple, losses for tax credits must first be set off against other income of both members of the couple for the current tax year, while for income tax only the other income of the partner carrying on the business can be used (see below under joint claims).
2. For income tax, any surplus loss not set off against other income in the current tax year can be carried back against income of the previous year, while for tax credits – as we explained above – there is no carry back of trading losses.

Joint claims

As mentioned above it is important to bear in mind that where there is a joint claim for tax credits, the order of set off of trading losses is firstly against current year income of the couple and then by way of carry forward against future profits of the same trade. This is because the tax credit rules say that any trading loss in a year has to be subtracted from the total household income of the couple. Each couple is treated as one claiming unit for tax credits.

The set off against the couple's combined household income in the case of a joint claim for tax credits may result in a lower figure of losses for carry forward than the equivalent figure for real tax.

Remember that from an income tax point of view – each individual is looked at completely separately whereas for tax credits it is the claiming unit, whether single or joint whose income and circumstances must be taken into account. If you have any doubts or concerns about the best way to use your losses, you may need to get some professional advice.

You can find more about how to report losses for tax credits on form TC825. There is also a useful albeit short section in the HMRC leaflet WTC2 on losses you might want to look at as well. You can find it on GOV.UK.

Universal credit

Universal credit uses monthly income and relief for losses is treated quite differently.

If your monthly accounts show your business making a loss, then you will be treated as having £nil income in that month and may be subject to the minimum income floor (MIF).

From April 2018, new rules were introduced which allow some carry forward of losses between assessment periods. So previous losses can be carried forward, but the carry forward of the loss can only ever reduce the income in an assessment period down to the level of the MIF (unless the claimant is exempt from the MIF).

See our website for advisers, RevenueBenefits, for more information.