NOT financial advice - seek advice from a professional for your specific situation

    TaxKilnUK tax guidance
    TaxKilnUK tax guidance

    Trading Losses (Sole Trader)

    UK sole traders + partnerships have FIVE main routes to use a trading loss: (1) SIDEWAYS RELIEF (ITA 2007 s.64), set against TOTAL INCOME in the loss year + previous year; capped at greater of £50,000 or 25% of adjusted total income. (2) CAPITAL GAINS EXTENSION (s.71), after exhausting s.64 income relief, remaining loss set against net capital gains in the same year. (3) EARLY-YEARS CARRY-BACK (s.72), first 4 years of trading; loss set against TOTAL INCOME of the 3 PRECEDING tax years; same cap as s.64. (4) CARRY-FORWARD against future profits of same trade (s.83), no cap, claim within 4 years of end of loss year. (5) TERMINAL LOSS RELIEF (s.89), final 12 months of trading; carry back 3 years against profits of same trade. Sideways relief capped at greater of £50,000 or 25% of ATI. Non-active trader (<10 hours/week) cap: £25,000 sideways. Commercial-basis test applies, hobby losses are denied. From 2024/25 cash basis losses can be used in all the same ways as accruals losses.

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    Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact HMRC. Read our editorial scope →

    What this relief is, in plain English

    UK trading loss relief is one of the most flexible loss-recognition systems in the OECD, five distinct routes giving sole traders multiple ways to extract value from a loss-making year. The choice depends on the loss size, the trader's other income profile, the stage of the business, + the specific tax planning objective. SIDEWAYS RELIEF (s.64) is the most common choice, set the loss against any other income (PAYE, rental, dividends, savings) in the current year or previous year. Maximum cash recovery at the trader's marginal rate. Capped at greater of £50,000 or 25% of ATI per year. EARLY-YEARS CARRY-BACK (s.72) is the specialist tool for new businesses. Losses in the first 4 years of trading can be carried back 3 years against TOTAL INCOME, including PAYE tax paid while the founder was still in employment. Generates refunds from years where there was no trade. CARRY-FORWARD (s.83) preserves the loss for future profits of the SAME TRADE. No cap on amount, but loss must be set against the same trade's profits going forward, no flexibility to use against other income later. Best for traders confident in long-term profitability + wanting to defer the relief. TERMINAL LOSS RELIEF (s.89) is the closure relief, losses arising in the final 12 months of trading can be carried back against profits of the SAME TRADE in the 3 preceding years. Generates refunds on cessation. EXTENSION TO CAPITAL GAINS (s.71) is the chase-the-tail relief, after s.64 has used all available income, any remaining loss can be set against net capital gains in the same year. Rare in practice but useful for traders with substantial gains in the loss year. The commercial-basis-with-view-to-profit test is the key gatekeeper. Hobby losses + non-active-trader scenarios face restrictive caps + outright denial. Genuine commercial trades with documented loss + recovery plans are fine.

    How it works

    Sideways relief (s.64), current + prior year

    Set trading loss against TOTAL INCOME of the year of loss + the previous year (claim either year or both, in any order). Caps: greater of £50,000 or 25% of Adjusted Total Income per year of claim. Election deadline: 1st anniversary of 31 January following the loss year (so 31 January 2027 for 2024/25 loss). Claim is ALL-OR-NOTHING per year, must relieve against income to maximum extent. Can waste Personal Allowance if loss reduces income below £12,570; carry-forward sometimes preferred to preserve PA.

    Capital gains extension (s.71), current year only

    After s.64 income relief is exhausted, any remaining loss can be set against NET CAPITAL GAINS in the same year (same year only, not prior year). Cap shared with s.64 (combined cap: greater of £50,000 or 25% of ATI). Income first, then gains. Useful for traders with substantial gain crystallisations in their loss year, rare in practice.

    Early-years carry-back (s.72), first 4 years of trade

    Losses arising in any of the FIRST 4 YEARS of trading can be carried back against TOTAL INCOME of the 3 PRECEDING tax years. Earliest year used first. Generates refunds of tax paid (including PAYE) in pre-trading years. Cap same as s.64. Powerful for new traders with significant pre-trading expenditure + ex-PAYE founders with substantial recent tax history.

    Carry-forward (s.83), same trade only, no cap

    Loss not relieved sideways or via early-years carry-back is automatically carried forward against future profits OF THE SAME TRADE. Must be claimed (registered with HMRC) within 4 years of end of loss year. No cap on amount carried forward. Loss is preserved indefinitely until same trade has profits to absorb it. Restriction: cannot be used against OTHER income types in later years, confined to same trade's profits.

    Who qualifies

    Interactions with other reliefs

    Pre-Trading Expenditure (s.57 + CAA s.12)

    Pre-trading expenditure absorbed in year 1 often creates or enlarges year-one losses → fed into s.72 early-years carry-back to recover PAYE tax paid pre-launch. The combined claim is one of the most powerful new-business tax-recovery routes.

    Personal Allowance (£12,570)

    Sideways relief (s.64) is all-or-nothing, can reduce income below the PA threshold + WASTE the PA. Carry-forward (s.83) preserves PA for use against future income. For losses that would reduce income below PA, often more efficient to carry forward rather than claim sideways. Calculate combined position carefully.

    Cash Basis Accounting (default from April 2024)

    Pre-2024/25, cash basis trading losses had restricted access to sideways relief + carry-back. From 2024/25 ONWARDS, cash basis losses are fully usable via all 5 relief routes, same as accruals losses. Major reform unlocking cash basis as a viable choice for early-stage / loss-making businesses.

    Incorporation carry-forward (s.86)

    Where a sole trader incorporates the business into a new Ltd Co, remaining trading losses can be carried forward + set against future income (salary + dividends) from the successor company under s.86, but only if consideration for the business transfer is at least 80% in shares + the individual holds those shares throughout the claim year. Mechanism for preserving accumulated sole-trader losses through corporate transition.

    Common mistakes + audit triggers

    Worked example

    Sara, Glasgow - Ex-PAYE management consultant in year 2 of freelance consultancy with £18,000 loss (2025/26)

    Sara left her £60,000 PAYE management consultancy job in March 2024 to launch a freelance practice. Year 1 (2024/25): turnover £22,000, expenses + pre-trading £24,000 → loss £2,000. Year 2 (2025/26): turnover £35,000, expenses £53,000 (substantial marketing investment + office setup) → LOSS £18,000. Sara's other 2025/26 income: £4,000 rental property profit (after Section 24 mechanics). Her PAYE income in years before launching: 2021/22 £55,000; 2022/23 £58,000; 2023/24 £60,000.

    Calculation: **Year 2 (2025/26) loss: £18,000.** Three main options for Sara (commercial basis clearly met): **Option A: Sideways relief (s.64), current year.** Set £18,000 against 2025/26 income (£4,000 rental). After sideways: 2025/26 income £4,000 - £4,000 = £0; PA £12,570 WASTED. Unused loss: £18,000 - £4,000 = £14,000 → can carry forward under s.83 OR carry back to 2024/25 (£0 income outside the £2,000 loss year) → useless. Problem: only £4,000 of relief generated; £14,000 of loss left over + PA wasted. **Option B: Early-years carry-back (s.72), first 4 years of trade.** 2025/26 is YEAR 2 of trade (started March 2024 = 2023/24 onwards as Year 1), qualifies for s.72. Carry back £18,000 against the 3 preceding tax years TOTAL INCOME (earliest first). - 2022/23 total income £58,000 PAYE: absorb up to £18,000 of loss → reduces 2022/23 income to £40,000 → REFUND of higher-rate PAYE tax paid on £18,000. - PAYE tax originally paid 2022/23 on the £18,000 slice: 40% × £18,000 = £7,200 refund. **Option B generates £7,200 cash refund, MUCH better than Option A's £4,000 sideways recovery.** **Option C: Carry-forward (s.83), preserve loss for future profits of same trade.** No immediate cash benefit. Preserves £18,000 to use against future year profits. Useful if Sara expects substantial profits within next 5-10 years + wants to defer relief. **Sara's optimal strategy:** File s.72 election with HMRC for 2025/26 → carry back £18,000 to 2022/23. Result: £7,200 cash refund from 2022/23 tax → processed by HMRC within 8-12 weeks. 2025/26 income £4,000 rental remains taxable (uses her Personal Allowance, no tax due on £4,000 below £12,570 PA). **Year 1 (2024/25) £2,000 loss treatment:** Already filed → claimed via s.72 against 2021/22 PAYE → £400 refund (20% × £2,000 = £400; was she higher rate in 2021/22? £55,000 income → mostly basic-rate band 2021/22 → £400 refund at 20%). **Combined value across both years:** Year 1 loss £2,000 → £400 refund (s.72 to 2021/22) Year 2 loss £18,000 → £7,200 refund (s.72 to 2022/23) **Total recovery on £20,000 of cumulative losses: £7,600 cash refund.** **Strategic note for year 3+:** After year 4 (2027/28), s.72 early-years carry-back is no longer available. Future losses can only be relieved via s.64 (current/prior year sideways), s.71 (capital gains extension same year), or s.83 (carry-forward same trade). Use the s.72 window aggressively in years 1-4.

    Statute reference: Income Tax Act 2007 ss.64 (sideways) + 71 (capital gains) + 72 (early-years) + 83 (carry-forward) + 89 (terminal) + 74 (non-active cap). HMRC manual: BIM85700 onwards.

    Frequently asked questions

    What happens if I miss the Self Assessment deadline?+
    The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.
    Do I need an accountant or can I file Self Assessment myself?+
    Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.
    How do payments on account work?+
    When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.
    I've had a £15,000 trading loss this year + PAYE income of £40,000, what's my best relief?+
    **Sideways relief (s.64) is typically the best choice for your scenario.** Mechanic: set the £15,000 loss against your £40,000 PAYE income for 2025/26. Result: taxable income reduces from £40,000 to £25,000. PAYE tax saved at 20% × £15,000 = £3,000 cash recovery (HMRC refund via PAYE adjustment). **Important caveat**: sideways relief is ALL-OR-NOTHING per claim, you can't choose to use only part of the loss. The loss is set against income to the maximum extent possible in the chosen year. This can WASTE the Personal Allowance if the loss reduces income below £12,570 → consider whether carry-forward (s.83) might preserve the PA + give better long-term value. For most sole traders with PAYE income above £30,000 + a loss under the £50,000 cap, s.64 wins on time-value-of-money grounds.
    How does the £50,000 / 25% of ATI cap on sideways relief work?+
    The cap applies to TOTAL sideways losses claimed against non-trading income in a given year, across ALL trades. For most sole traders the cap doesn't bite (losses are below £50,000). Where it matters: someone with multiple trades all loss-making, or a single trade with a one-off large loss. **Calculation**: cap = GREATER of £50,000 or 25% of Adjusted Total Income (ATI = total income minus charitable donations minus pension contributions). Example: ATI £100,000 → cap = greater of £50,000 or £25,000 → £50,000 cap. ATI £400,000 → cap = greater of £50,000 or £100,000 → £100,000 cap. Excess loss above the cap can carry forward under s.83 against future profits of the same trade, no cap on carry-forward.
    I started my freelance business 18 months ago + had losses both years, can I get tax back from when I was employed?+
    Yes, EARLY-YEARS CARRY-BACK (ITA 2007 s.72) is designed exactly for your scenario. Losses arising in any of the FIRST 4 YEARS of trading can be carried back against TOTAL INCOME (including PAYE employment income) of the 3 PRECEDING tax years. The mechanic: take your £X loss from 2025/26, carry it back to 2022/23 first (earliest year), then 2023/24, then 2024/25, until the loss is fully relieved. Generates cash refunds of PAYE tax paid in those years. Cap: same as s.64, greater of £50,000 or 25% of ATI per year. The earliest qualifying loss year MUST fall within the first 4 years of trade (years 5+ losses use s.64 / s.83 only).
    What's the 'commercial basis with view to profit' test + can it deny my loss claim?+
    Yes, this is HMRC's primary defence against hobby losses being relieved sideways. ITA 2007 specifically requires the trade to be conducted 'on a commercial basis + with a view to profit' for sideways relief or extension to gains to be available. HMRC's BIM85700 series tests this rigorously. A loss-making activity in arts, equestrian, farming, photography, smallholding, classic-car restoration, or similar hobby-adjacent sectors with REPEATED losses + no realistic prospect of profit will be denied sideways relief. **What 'commercial basis' looks like**: documented business plan + pricing at market rates + active marketing/customer acquisition + records of attempts to grow + adjusting strategy in response to losses. Hope of eventual profit from a passion project is INSUFFICIENT. TWP Accounting (2025) reaffirmed the test: 'a view to profit' requires genuine commercial intention evidenced by business behaviour. Three+ consecutive loss-making years in a hobby-adjacent sector is a high-risk audit profile.

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