In difficult trading conditions, a sole trader may realise a loss rather than a profit. Where this is the case, it is important that the trader realises that they may be able to claim tax relief for trading losses. There is more than one way in which this can be done, and the best route will depend on the trader’s other income and personal circumstances.
The relief must be claimed.
Option 1: against other income of the same or previous tax year
Where the trader has other income, such as income from employment, property or investments, they can claim to set the loss against their income of the same tax year and/or the previous tax year. The trader can make a claim for one or both of these years, depending on the amount of the loss, and the claims can be made in any order.
It is important to note that it is not possible to make a partial claim, for example to prevent the loss of personal allowances. A claim is not mandatory, and where it is not beneficial, for example, because personal allowances may be lost, the trader can take a different route.
Example
Joe is a self-employed decorator. In 2024/25 he made a loss of £12,300. He has a part-time job, from which he earns £14,000. In 2023/24 Joe had total income of £42,000.
If Joe opts to set the loss against his other income of 2024/25, he will waste all but £1,700 of his personal allowance. It is not possible to use only £1,430 of the loss to reduce his income to £12,570 which would be covered by his personal allowance.
However, if he sets the loss against his income of 2023/24, he will reduce his income to £29,700, saving £2,460 in tax.
Option 2: extension to capital gains
Where the taxpayer has claimed relief against other income and is unable to use all the loss, the taxpayer may be able to use the balance against capital gains of that year. Depending on the numbers, this route may result in the loss of the capital gains tax annual exempt amount, although despite this, it may still be worthwhile.
Option 3: Carry forward against future trading profits
Although conventional wisdom is to secure relief for a loss as early as possible, if a claim against other income would waste the personal allowance, it may be preferable to carry the loss forward and set it against future profits of the same trade. Where this route is taken, the loss must be set against the first available trading profits.
Opening and closing years
Additional claims are available for losses made in the opening and closing years of a trade.
A loss made in the first four years of a trade may be set against an individual’s income for the previous three tax years, setting the loss against the earliest of those years first.
Where a loss is made in the final 12 months of a trade (a terminal loss), it may be set against profits from the same trade in the same tax year as the loss and in the previous three tax years. The loss is relieved against the profits of a later year first.
Loss relief cap – For Trading Lossess
The amount of loss relief that a person can claim in any one tax year is in certain cases capped at the higher of £50,000 and 25% of their adjusted net income for that tax year.
