When can a trading loss generate a tax refund

Making a trading loss is never the aim. However, a loss can sometimes work in your favour. Indeed, it may even generate a tax refund.

Self-employed individuals and members of trading partnerships have options. In many cases, you can set a trading loss against other income. Alternatively, you may be able to set it against capital gains. Consequently, your tax bill falls. Where you have already paid the tax, a refund may follow.

Using a loss against the current or previous year

The 2025-26 tax year ended in April. For that year, you can generally set a loss against income in either:

• the same tax year, or
• the previous tax year

Therefore, timing really matters. Imagine a business that made a profit in an earlier year. It has since made a loss. In that case, it may recover some of the tax it previously paid.

The restrictions you need to know

Unfortunately, the rules are not unlimited. Several restrictions apply, so check your position carefully.

• You must carry on the trade commercially and with a view to profit.
• HMRC will not accept relief for a hobby activity.
• Further restrictions can apply depending on your circumstances.
• Restrictions also apply where you work fewer than 10 hours a week on the trade.

In addition, a cap applies to certain Income Tax reliefs claimed against total income. Generally, that limit is the higher of £50,000 or 25% of adjusted total income. You can read HMRC’s guidance at https://www.gov.uk/guidance/relief-for-trading-losses.

Carrying a loss forward

Alternatively, you may prefer to look ahead. You can usually carry a loss forward instead. You then set it against future profits from the same trade. As a result, the relief is not lost, even if you cannot use it now.

So, when can a trading loss generate a tax refund in practice? It depends on your income, your gains and the year in question.

Talk to us

The rules here are complex, so please do not guess. Contact us and we will advise you on the best way forward.