Trading Losses: Carry-Back vs Carry-Forward — Which Suits You?

Why Your Trading Loss Is Actually an Asset

A loss-making year feels painful, but under UK tax rules, that loss has real monetary value. HMRC allows businesses to use trading losses to offset tax — either against past profits (carry-back) or future profits (carry-forward). Choosing the wrong approach can leave money on the table, so it pays to understand both options properly.

The Two Main Strategies

Carry-Back: You offset your loss against profits from a previous year, generating a repayment of tax already paid. For sole traders, you can carry back losses one year against profits from the same trade. Limited companies can carry back losses one year as standard, or up to three years under the temporary extended carry-back rules (though note the three-year extension introduced during COVID has now expired for most periods — standard one-year rules apply for accounting periods ending after April 2022).

Carry-Forward: You roll the loss forward and offset it against future profits from the same trade. There is no time limit on carrying losses forward, and for limited companies, losses arising from April 2017 onwards can also be carried forward against profits from other group companies or different income streams — a significant flexibility.

Sole Traders: What the Rules Mean in Practice

As a sole trader, your options under Section 64 and Section 83 ITMA 2007 are:

• Offset against general income in the same tax year and/or the previous tax year (this is not strictly carry-back but is often used alongside it)
• Carry back one year against profits of the same trade
• Carry forward indefinitely against future profits of the same trade

Carry-back makes most sense if you had a profitable year previously and paid Income Tax and National Insurance at a high rate — you get a cash refund quickly. Carry-forward is better if you expect strong future profits and want to shelter them, or if your previous year's income was low enough that carry-back would generate little benefit.

Limited Companies: Greater Flexibility, More Complexity

For limited companies, losses are governed by the Corporation Tax Act 2010. Key points:

• Carry-back is limited to one accounting period (12 months) against total profits
• Carry-forward losses from April 2017 onwards are more flexible — they can offset against total profits, not just trading profits
• A £5 million deductions allowance applies — losses above this threshold are restricted to 50% offset against profits in any single year
• Group relief allows losses to be surrendered to profitable group companies in the same period

Which Strategy Suits Your Business?

Use this as a starting framework:

• Choose carry-back if you need cash now, had significant profits in the prior year taxed at 25% Corporation Tax or higher-rate Income Tax, and the repayment will help your cash flow
• Choose carry-forward if your prior year profits were modest, you expect strong growth ahead, or you want to reduce future tax bills when your profits — and tax rates — will be higher
• Consider both if your loss is large enough — carry back part of it for an immediate refund and carry forward the remainder

Don't Miss the Deadline

For sole traders, a carry-back claim must be made within 12 months of the 31 January filing deadline for the loss-making tax year. For limited companies, carry-back claims must be made within two years of the end of the accounting period in which the loss arose. Missing these deadlines means losing the carry-back option entirely — you would only be left with carry-forward.

Get Advice Before You Decide

The right choice depends on your marginal tax rate, your cash position, and your profit projections. A decision that saves £3,000 this year might cost you £6,000 in three years if your profits grow significantly. Always model both scenarios — or speak to a qualified accountant — before submitting your claim.