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 2024/25 is the tax year ended 5 April 2025.

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 2024/25 tax year. They will need to make a claim by 31 January 2027.

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 2024/25 tax year. They will need to make a claim by 31 January 2027.

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 2024/25 tax year. They will need to make a claim by 31 January 2027.

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 2024/25 tax year. You will need to make a claim by 5 April 2029.

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 2024/25 tax year. They will need to make a claim by 5 April 2029.

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 universal credit

For specialist information on how trading losses are treated for universal credit purposes, see our website for advisers, RevenueBenefits, for more information.