Claiming Business Losses

How to Use Trading Losses to Reduce Your Tax

A trading loss occurs when your allowable expenses exceed your income in a tax year. For example, if your business earned £15,000 but you had £20,000 in allowable expenses, you have a £5,000 loss.^[1]

Sideways Relief (Against Other Income)

You can offset your trading loss against other income in the same tax year. For example, if you have a £5,000 business loss and £30,000 employment income, you can reduce your taxable employment income to £25,000.^[1]

This is called “sideways relief” and can produce an immediate tax refund or reduction.

Carry Forward

If you don’t use sideways relief (or still have losses left over), you can carry the loss forward indefinitely to offset against future profits from the same trade.^[1]

Carry Back

You can also carry a loss back to the previous tax year and offset it against your total income for that year. This can generate a tax refund.^[2]

Early Years Relief

If you make a loss in the first four years of your trade, you can carry it back three years (instead of just one). This is particularly useful for new businesses with high start-up costs.^[1]

Cap on Income Tax Reliefs

Sideways and carry-back loss relief is capped at the greater of:^[2]

£50,000, or
25% of your total income

Any losses above this cap can still be carried forward against future trade profits without limit.

Cash Basis Restriction

If you use the cash basis, your options are more limited:^[5]

Losses can only be carried forward against future profits from the same trade
No sideways relief against other income
No carry back

If you expect to make a loss and want to use sideways relief, you should opt for accruals accounting instead.

Planning tip: If you’re starting a business and expect losses in the early years, consider using accruals accounting so you can claim sideways relief against other income like employment earnings.

How to Claim

Loss relief is claimed through your Self Assessment tax return. The SA103 (self-employment pages) has specific boxes for declaring losses and choosing how to use them.^[3] You can submit your return online with HMRC-recognised software such as GoFile.

Frequently Asked Questions

Can I use self-employed losses to reduce my other income?

Yes, if you use accruals accounting. Sideways relief lets you offset trading losses against other income (such as employment earnings) in the same tax year, which can produce an immediate tax refund. This is not available under the cash basis.

How long can I carry forward a business loss?

You can carry forward trading losses indefinitely to offset against future profits from the same trade. There is no time limit on how long carried-forward losses remain available.

What is the cap on loss relief against other income?

Sideways and carry-back loss relief is capped at the greater of £50,000 or 25% of your total income. Any losses above this cap can still be carried forward against future trade profits without limit.

Can I claim loss relief in my first years of trading?

Yes. If you make a loss in the first four years of your trade, you can carry it back three years instead of just one. This early years relief is particularly useful for new businesses with high start-up costs.

Sources

Losses — GOV.UK
How to work out your taxable profits — GOV.UK
Self Assessment tax returns — GOV.UK
Income Tax: general enquiries — GOV.UK
Cash basis — GOV.UK

How to Claim Business Losses Against Tax