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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Trading losses

Being self-employed or being a partner in a partnership means that you run the risk of making a loss. This page explains the various ways you may get tax relief for a trading loss. This can mean that you get a reduction in your tax bill or perhaps get a tax refund. We also consider below how tax credits and universal credit (UC) are affected by losses in your business.

Content on this page:

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.

Example: Tom

Tom's accounting year ends on 31 March. In the year to 31 March 2023, Tom had the following income and expenses:

Income: £10,000

Expenses: £15,000

Capital allowances: £2,000

Tom's accounting year ends in 2022/23 and so this means that Tom has a loss of £7,000 (£10,000 less £15,000 less £2,000) for the 2022/23 tax year.

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.

Example: Zelda

Zelda is a yoga instructor and prepares her accounts using the cash basis. She usually claims the trading allowance. She has received trading income of £2,100 in the year ended 31 March 2023. If Zelda claims the trading allowance (£1,000) for 2022/23 her taxable profit will be £2,100 less £1,000 = £1,100. However, her expenses are higher than normal in the year ended 31 March 2023 as she paid £1,500 for a specialist yoga course in December 2022. Her total business expenses for the year ended 31 March 2023 are £2,345 in total.

Therefore, it is better for Zelda to claim her business expenses and not the trading allowance in 2022/23, as she will then have nil taxable profits in 2022/23 and be able to claim tax relief for a loss of £245 (£2,100 less £2,345).

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 2022/23 is the tax year ended 5 April 2023.

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 in 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.

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 theextended 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.

Subject to meeting certain criteria, a loss arising in 2021/22 could be offset against profits in tax years 2020/21, 2019/20 and 2018/19 in specific circumstances. The claim has to be made by 31 January 2024 in most cases. Similarly, a loss arising in 2020/21 could be offset against profits in tax years 2019/20, 2018/19 and 2017/18 in specific circumstances, but a claim for this had to be made by 31 January 2023 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.

The loss must have been calculated using the accruals basis of accounting.

Example: Kurt

Kurt, who lives in England, made a loss on his self-employment of £8,000 for the tax year 2022/23. During that year he was also employed and earned £30,000, and he paid tax of £3,486 under PAYE. He can set the loss against his employment income in the same tax year, leading to a refund of some of the tax he paid via PAYE:

Kurt’s tax position for 2022/23

Income  
 

£

Employment income

30,000

Self-employment loss

-8,000

 

22,000

Less personal allowance

-12,570

Income on which tax is due

9,430

 

 

Tax due at 20%

1,886

Less: tax deducted from employment income

-3,486

Tax refund due

-1,600

Example: Chandler

Chandler who lives in England, made a loss in his first year of self-employment of £2,000 for the tax year 2022/23. He had no other income in 2022/23 but in 2021/22 he had been employed and had PAYE income of £18,000. Tax of £1,086 was deducted from his PAYE income during the year. Chandler can set off the loss of £2,000 against his employment income in 2021/22, leading to a refund of some of the tax paid under PAYE for that year.

Chandler’s revised tax position for 2021/22 is:

Income

 

 

£

Employment income

18,000

Self-employment loss from 2022/23

-2,000

Total taxable income

16,000

Less personal allowance

-12,570

Income on which tax is due

3,430

 

 

Tax due at 20%

686

Less: Tax deducted from employment income

-1,086

Tax refund due

-400

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.

Example: Monika

Monika who lives in England, made a loss on her self-employment of £5,000 for the tax year 2022/23. During that year she also had part-time employment and earned £14,500 (with tax deducted under PAYE of £386) but had no other income. She can set the loss against her employment income, but her personal allowance for 2022/23 is £12,570, so by using theloss in this way, her total taxable income falls below the level of the personal allowance.

Monika’s tax position for 2022/23 is:

Income

 

 

£

Employment income

14,500

Self-employment loss

-5,000

Total taxable income

9,500

Less personal allowance

-12,570

Income on which tax is due

0

 

 

Tax due at 20%

0

Less: Tax deducted from employment income

-386

Tax refund due

-386


Claiming the loss relief in this way will waste some of her personal allowance, although she will get a tax refund of £386. She may choose to use an alternative loss relief.

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.

The loss must have been calculated using the accruals basis of accounting.

Example: Usman

Usman made a loss on his self-employment of £8,000 for the tax year 2022/23. During that year he was also employed part-time and earned £5,000. He also made a capital gain on the sale of some shares of £14,000. He must first set the loss against his employment income of £5,000, and then he can set the remaining part of the loss of £3,000 against the capital gain.

Usman’s tax position for 2022/23 is:

Income  
 

£

Employment income

5,000

Self-employment loss

-5,000

Total taxable income

0

Less personal allowance

-12,570

Income on which tax is due

0

 

 

Capital gain

14,000

Less: remainder of self-employment loss (£8,000 less £5,000 already used)

-3,000

Total gains

11,000

Less: capital gains tax annual exemption

-12,300

Taxable gains

0


As Usman’s employment income would not be taxable anyway because it is less than the personal allowance there is no income tax saving arising from offsetting the loss against his other income in 2022/23.

Also, by using the remainder of the loss against the capital gain, some of the capital gains tax annual exempt amount is wasted. But there is a tax saving within the current tax year of £170, which is the capital gains tax that would be due if the loss was not used in this way (being £14,000-£12,300=£1,700 x 10% = £170.). For more information on this calculation see our section on capital gains tax.

Therefore, this may not be the best way to use Usman’s loss, and he should look at other ways of getting tax relief for this loss to see if it gives a greater tax saving.

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.

Example: Kasper

Kasper who lives in England, uses the cash basis for preparing his accounts. During the 2022/23 tax year he purchased a new work van and so made a loss of £7,000 in that tax year. Kasper does not have any other income.

Due to advance orders, he knows he will be profitable in the 2023/24 tax year. As Kasper is not using any other loss relief, he must carry the loss of £7,000 from 2022/23 forward and offset it against profits from the same self-employment in the next tax year in which he makes a profit.

During 2023/24 Kasper’s business profits are £22,000 and therefore he must use the loss carried forward of £7,000 and offset it against his profits in 2023/24.

Kasper’s income tax position for 2022/23 and 2023/24 is:

Income

2022/23

2023/24

 

£

£

Self-employment profit

0

22,000

Less: self-employed loss from 2022/23

 

-7,000

Total taxable income

0

15,000

Less personal allowance

-12,570

-12,570

Income on which tax is due

0

2,430

Income tax due at 20%

0

486

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.

The loss must have been calculated using the accruals basis of accounting.

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

Example: Jules

Jules was employed for many years, but in 2021/22 he decided to leave his employment and start up his own self-employed delivery business.

His employment income over recent years was:

2019/20: £15,000

2020/21: £18,000

2021/22: £9,000

And his self-employed profit and losses have been as follows:

2021/22: £3,000 profit

2022/23: £20,000 loss

Jules made a small profit in his first period of trading, but then decided to invest in a new van and some equipment and so he made a substantial loss in 2022/23.

As 2022/23 is the second tax year he has been trading, he qualifies for tax relief under these rules.

The loss can be offset against other income in the three previous tax years 2021/22, 2020/21 and 2019/20, starting with the earliest year first.

After the offsetting of the loss, Jules’ tax position becomes as follows:

Income

2019/20

2020/21

2021/22

2022/23

 

£

£

£

£

Employment income

15,000

18,000

9,000

 

Self-employment income

 

 

3,000

0

Less self-employment loss

-15,000

-5,000

 

 

Total taxable income

0

13,000

12,000

0


The loss claim reduces the taxable income in 2019/20 from £15,000 to £0, and in 2020/21 it reduces the taxable income from £18,000 to £13,000. The tax due for those years is recalculated, which means tax will now be overpaid for those two tax years and this will be refunded.

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.

Example: Sarah

Sarah has run a café for many years, but due to coronavirus lockdowns in the spring and summer of 2020 and rising rental costs she struggled to keep the business going and she closed the café permanently in December 2022.

Her self-employment profits and final loss were as follows:

Year ended 31 March 2020: £25,000 profit

Year ended 31 March 2021: £10,000 profit

Year ended 31 March 2022: £10,000 profit

9 months to 31 December 2022: £15,000 loss

Sarah’s final 12 months of trading is the period from 1 January 2022 to 31 December 2022.

Firstly, Sarah needs to work out her loss for this final 12-month period. This is the loss for the last nine-month period 1 April 2022 to 31 December 2022 plus any loss for the previous three months 1 January 2022 to 31 March 2022.

The loss for the 9 months to 31 December 2022 is £15,000. As the period 1 January 2022 to 31 March 2022 had a profit, the amount of the loss is £nil. The total loss, called the terminal loss, is therefore £15,000.

This loss has arisen in 2022/23 and may be offset against self-employment profits from the previous three tax years, 2021/22, 2020/21 and 2019/20, starting with the most recent of those years, which is 2021/22:

Income

2019/20

2020/21

2021/22

2022/23

 

£

£

£

£

Self-employment profits

25,000

10,000

10,000

0

Less: self-employment loss

 

-5,000

-10,000

 

Total taxable income

25,000

5,000

0

0

 

 

 

 

 

Less personal allowance

-12,500

-12,500

-12,570

-12,570

Income on which tax is due

12,500

0

0

0

The loss is therefore used as follows:

2021/22: £10,000 (used against all trading profits)

2020/21: £5,000 (balance)

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.

Example: Jane

Jane is a self-employed football coach and lives in England. Her income is usually around £20,000 per year, and her annual taxable profit is usually in the region of £12,000 to £15,000. In the year to 31 March 2023 her income was only £4,000, as she had an injury which meant she couldn’t coach as much as she had done in previous years. Her allowable business expenses in the year to 31 March 2023 were £6,485, and she spent £1,500 on new equipment which qualifies for the annual investment allowance (AIA) capital allowances.

Jane works out the loss from her self-employment to be £3,985, by deducting her expenses and AIA capital allowances from her total income:

£4,000 less £6,485 less £1,500 = £-3,985

Jane is also employed part-time as a PE teacher, and in 2022/23 her salary was £14,800 (tax paid of £460).

Jane claims to offset the loss from her self-employment against her other income (from teaching) for the 2022/23 tax year. This makes her taxable income for 2022/23:

£14,800 less £3,985 = £10,815.

As the taxable income is below the tax-free personal allowance of £12,570, Jane does not owe any tax for 2022/23 so the tax deducted from Jane’s PAYE income of £460 will be repaid to her.

However, if Jane does not claim AIA for her new equipment costs (and claims writing down allowances in respect of the expenditure in the 2023/24 tax year instead), her loss for 2022/23 becomes £2,485 (£4,000 - £6,485 = £2,485).

If she offsets this against her PAYE income, her taxable income for 2022/23 becomes:

£14,800 less £2,485 = £12,315.

The taxable income is still below the amount of the tax-free personal allowance of £12,570, so the tax deducted from Jane’s PAYE income of £460 will still be repaid. However, in this scenario Jane makes better use of her personal allowance as she uses £1,500 more of the allowance and can also claim capital allowances in future tax years in respect of the new equipment costs of £1,500.

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

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 2022/23 tax year. They will need to make a claim by 31 January 2025.

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

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 2022/23 tax year. They will need to make a claim by 31 January 2025.

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

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 2022/23 tax year. They will need to make a claim by 31 January 2025.

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 forward 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 2022/23 tax year. You will need to make a claim by 5 April 2027.

Top tips

  The cash basis restricts how you can utilise trading losses. It should be possible to change to the accruals basis as having trading losses would be classed as a commercial reason to leave the cash basis.

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 2022/23 tax year. They will need to make a claim by 5 April 2027.

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.

Example: Hameed

Hameed, who lives in England, was employed until March 2021, when he decided to set up his own window cleaning business. Hameed’s only income since April 2021 has been from his self-employment as a window cleaner. In the 2021/22 tax year he made a profit of £10,000 but his accounts for the year to 31 March 2023 show a loss of £4,000.

He has prepared his accounts on an accruals basis and he decides to make a claim to carry back the loss of £4,000 to the 2019/20 tax year under the ‘opening year losses’ rules and offset it against his employment income in that year of £20,000. This will generate a tax refund to claim on his 2022/23 tax return of £800 (£4,000 x 20%).

However, this claim does not save Hameed any Class 4 NIC as this is not charged on employment income. Therefore, Hameed has not had the full relief he is entitled to for the loss of £4,000.

In these circumstances, Hameed is allowed to reduce his profits on which he will pay Class 4 NIC in the next tax year by the amount of £4,000. He is predicting that his profits for the year ended 31 March 2024 will be in the region of £14,000. Therefore, Hameed’s profits for Class 4 NIC purposes for the 2023/24 tax year will be £10,000 (£14,000- £4,000). As the Class 4 lower profits limit for 2023/24 is £12,570 he will not now be liable for any Class 4 NIC in 2023/24.

With regard to Class 2 NIC for 2023/24, as the reduction for the loss means he is also below the Class 2 lower profits limit, he will not be required to pay Class 2 NIC but as his profits are more than the small profits threshold he will be treated as though he has paid it for the purpose of entitlement to contributory benefits.

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.

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