Loss Relief for Sole Traders: Cut Your Tax Bill With Smart Planning

What Counts as a Trading Loss?

A trading loss occurs when your allowable business expenses exceed your trading income in a tax year. This can happen during a slow period, when you are investing heavily in your business, or simply because of a tough trading environment. The good news is that HMRC does not make you simply absorb that loss — you have several relief options available.

Option 1: Set the Loss Against Other Income in the Same Year

Under Section 64 ITA 2007, you can set a trading loss against any other income you earned in the same tax year — for example, employment income, rental income, or savings interest. You can also extend this claim to the previous tax year if you had other income then.

This is often the fastest route to a tax refund. If you were employed part of the year, or have a working spouse whose income you cannot touch, this can offset a significant chunk of your personal tax liability.

• The claim must be made within 12 months of 31 January following the tax year of the loss
• You must use the full loss against income — you cannot choose a partial amount
• It can reduce your income below your Personal Allowance, meaning you may lose the benefit of that allowance

Option 2: Carry the Loss Back

If you have already paid tax in a previous year, you may be able to carry the loss back and claim a refund. Under Section 64 ITA 2007, losses can be carried back one tax year against income from the same period. For example, a loss in 2025/26 could be carried back to 2024/25.

For new businesses in the first four years of trading, there is an even more generous rule under Section 72 ITA 2007. You can carry losses back up to three years, on a last-in-first-out basis. This is known as Early Trade Losses Relief and can be particularly useful if you left employment to go self-employed and paid significant tax in your final years of PAYE.

Option 3: Carry the Loss Forward

If you do not want to — or cannot — use the loss in the current or previous year, you can carry it forward indefinitely under Section 83 ITA 2007. The loss is then automatically set against future profits from the same trade.

• You do not need to make a formal claim — this is the default position if you do nothing
• The loss must be used as soon as there are sufficient profits — you cannot hold it back strategically
• It only works against profits from the same trade, not other income

Option 4: Terminal Loss Relief

If you are closing your business, Terminal Loss Relief under Section 89 ITA 2007 lets you carry any loss from the final 12 months of trading back against profits from the three preceding tax years. This can result in a substantial refund if your business was profitable for several years before winding down.

Which Option Should You Choose?

The right choice depends on your personal tax position. As a rough guide:

• If you have paid tax in the previous year at a higher rate, carrying back often gives the best cash outcome
• If you expect strong future profits, carrying forward preserves the relief for when it is most valuable
• If you have other income in the current year, a same-year claim can reduce your January tax bill immediately

Be aware that using a loss against income below your Personal Allowance wastes that allowance, so always model the numbers before submitting a claim.

How to Make a Claim

Loss relief claims are made through your Self Assessment tax return. You report the loss on your SA103 (self-employment pages) and indicate which relief you are claiming. Make sure you keep records of all expenses that created the loss, as HMRC may ask for evidence.

If you are unsure which route suits your situation, speaking to an accountant before the filing deadline could save you significantly more than their fee.