Loss Utilisation Strategies

Key facts

Trading losses can be carried forward indefinitely against future profits of the same trade.
Carry back lets you offset losses against the previous year’s profits for a tax refund.
Sideways relief allows trading losses to be set against other income in the same year.
Terminal loss relief lets you carry back losses from the final 12 months of trading to the previous 3 years.
Companies and sole traders have different rules for how losses can be used.

Why Loss Utilisation Matters

Making a trading loss is never the goal, but when it happens, using the loss efficiently can provide valuable tax relief — either as an immediate refund or a reduction in future tax bills. The key is understanding the different options and choosing the most valuable one for your circumstances.^[1]

Loss Relief for Sole Traders

Relief	How It Works	Legislation
Carry forward	Set against future profits of the same trade	s.83 ITA 2007
Sideways relief	Set against other income in the same year or previous year	s.64 ITA 2007
Capital gains offset	Set against capital gains (if sideways claim made first)	s.261B TCGA
Opening year losses	Carry back against income of the 3 years before the loss year	s.72 ITA 2007
Terminal loss relief	Carry back against profits of the same trade in the previous 3 years	s.89 ITA 2007

Sideways Relief: Worked Example

You have a side business that makes a £15,000 loss in 2026/27. Your employment income is £60,000:

Without Sideways Relief	With Sideways Relief
Employment income: £60,000	Employment income: £60,000
Less personal allowance: £12,570	Less trading loss: £15,000
Taxable: £47,430	Net income: £45,000
—	Less personal allowance: £12,570
—	Taxable: £32,430
Tax: ~£11,386	Tax: ~£6,486
Saving: —	Saving: ~£4,900

Tip: Sideways relief is especially valuable if you are a higher-rate taxpayer, as the loss saves tax at 40% or 45%. If the loss would only save tax at 20% this year but 40% in future years, carrying forward may be more valuable.

Loss Relief for Companies

Companies have similar options, with some differences:^[2]

Relief	How It Works
Set against current-year total profits	Trading losses offset all profits (including capital gains) in the same accounting period
Carry back (1 year)	Offset against total profits of the previous 12-month period
Carry forward (indefinitely)	Offset against total profits in future periods (subject to £5m deductions allowance)
Group relief	Surrender losses to other companies in a 75% group
Terminal loss relief	Carry back losses from the final period against total profits of the previous 3 years

Opening Year Loss Relief (New Businesses)

If you make a loss in any of the first four tax years of a new trade, you can carry the loss back against your total income of the three years before the loss year (earliest year first). This is particularly valuable if you had employment income before starting your business.^[1]

Example: You start a business in 2025/26 and make a £20,000 loss. Under opening year loss relief, you can carry this back against your total income in 2022/23 first, then 2023/24, then 2024/25. If you were employed earning £40,000 in those years, you could reclaim up to £8,000 of tax.

Strategic Considerations

Tax rate differential: Set losses against income taxed at the highest marginal rate
Timing of refunds: Carry back gives an immediate refund; carry forward defers the benefit
Personal allowance waste: Sideways relief can waste your personal allowance if it reduces income below £12,570
Group relief (companies): Surrendering losses to a profitable group company provides immediate benefit
Record keeping: Losses must be claimed within time limits (4 years for Income Tax, 2 years for CT carry-back)

Frequently Asked Questions

Can I carry trading losses forward indefinitely?

Sole traders can carry forward trading losses indefinitely against future profits of the same trade. Companies can carry forward trading losses indefinitely against total profits (from 1 April 2017), but a £5 million deductions allowance cap applies to carried-forward losses above that threshold.

What is sideways loss relief?

Sideways relief lets you offset a trading loss against your other income (e.g., employment income, rental income) in the same tax year. For sole traders, this is claimed under s.64 ITA 2007. It can generate a tax refund if you have paid tax on the other income. There is a cap of £50,000 or 25% of adjusted total income (whichever is greater) for non-active partners.

How does carry-back work?

Sole traders can carry back a trading loss one year (under s.64 ITA 2007), setting it against total income of the previous year. Companies can carry back trading losses one year against total profits. In both cases, this generates a tax refund for the earlier year. Terminal loss relief extends the carry-back to three years.

Can I use capital losses against trading profits?

No. Capital losses can only be offset against capital gains, not against trading or other income. Similarly, trading losses generally cannot be used against capital gains (except via a specific election under s.261B TCGA for sole traders).

Sources

Claim tax relief for losses — GOV.UK
Corporation Tax: trading losses — GOV.UK
Business Income Manual: BIM85000 – Losses — HMRC