An introduction to trading losses
If you are self‑employed or a partner, business losses can provide valuable tax relief. However, the rules vary. Each option suits different circumstances. Therefore, choosing carefully helps maximise relief and avoid mistakes.
Trading losses arise when business expenses exceed income. Although disappointing, losses can reduce tax elsewhere. However, each loss can only be used once. As a result, forward planning becomes essential.
Using losses against current or earlier income
For the 2025–26 tax year, you may claim relief against total income. This includes income from the same year. You may also claim against the previous tax year. However, you must usually use the loss fully in one year first. Only then can you apply any remaining amount elsewhere.
This approach often generates quick tax repayments. Therefore, it suits higher earners with other income sources. However, you should review the impact on allowances and relief caps. Guidance is available on the
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim85000.
Setting off losses under special claims
Setting off losses may also apply to earlier years in limited situations. New businesses can claim early trade relief. This applies to the first four years of trading. Losses can offset income from the previous three tax years. Importantly, claims start with the earliest year first.
This relief can produce repayments quickly. However, strict deadlines apply. Most claims must be submitted by 31 January 2027. Therefore, record keeping remains vital.
Using losses against future profits
Where immediate relief is unavailable, carry forward relief may apply. This allows losses to offset future profits from the same trade. Although slower, this approach supports long‑term recovery. However, it cannot reduce unrelated income. Business forecasts therefore help guide decisions.
Business closure and final period relief
When a trade ceases, terminal loss relief may apply. Losses from the final 12 months qualify. You can carry them back against earlier profits. This can span up to three previous tax years. Importantly, claims start with the most recent year first.
Restrictions and relief limits
HMRC restricts relief where a trade lacks commercial purpose. Activities without a profit motive may not qualify. In addition, an overall relief cap applies. This equals the higher of £50,000 or 25% of adjusted income.
