If you have made a loss (so your expenses are more than your income) in your accounting year, there are various options available.

Loss relief is only available where a business has been run on a commercial basis, with the view to making a profit.

The loss relief claim(s) that are available depend on whether the trade has started within the last four years, is a continuing trade or the trade has ceased.

Carry back the loss in the opening years of trade

Losses incurred in the course of carrying on a trade, profession or vocation in the first four years of trading can be relieved against the trader’s other income of the three tax years preceding the year of loss.

For example, if a trade commences on 1 January 2023 (ie in 2022/23), the special loss relief will be available in respect of losses sustained in 2022/23, 2023/24, 2024/25 and 2025/26. Trading losses in each of these years can be carried back for three years.

Relief is not given automatically. A claim must be made by the first anniversary of 31 January following the year in which the loss arose (eg 31 January 2025 for a loss incurred in the 2022/23 tax year). 

The claim is usually made on the white space of the tax return for the year of the loss, but a stand-alone claim can also be made by writing to HMRC.

HMRC’s view is that when carrying back a loss to earlier years, the previous tax returns are not amended. Instead, relief is given by calculating the adjustment to the tax (and Class 4 national insurance contribution (NIC) liability if appropriate) for the previous year(s) and entering this figure on the tax return for the year of the loss. 

Any remaining losses after an opening year loss relief claim may be relieved in any other way permitted.

Losses made in an established trade

A loss may be relieved against the following:

-Total income of the year of loss or the preceding year 

-Current year or preceding year capital gains, to the extent that losses cannot be relieved against current or prior year total income

Where a person makes a loss in the course of carrying out a trade, profession or vocation, relief is available against their net income for the period of the loss and / or the preceding year. Net income (sometimes also referred to as general income) is defined as total income less any deductible payments, but before personal allowances.

Where a person claiming relief for a trade loss against net income is unable to make full use of that loss, the balance may be used as an allowable loss for the purposes of CGT. This may be done in the year that the losses arise, or the preceding year.

Where a trader makes a trading loss and this is connected (whether directly or indirectly) to tax avoidance arrangements, no loss relief is available other than carrying forward against profits from the same trade. Tax avoidance arrangements are those where the main purpose or one of the main purposes is to avoid tax.

Loss relief planning

The main factors that should be taken into account in loss relief planning are as follows:

• marginal rate of tax ― for maximum savings, losses should be offset in priority against income taxed at higher marginal rates of tax
• personal allowances and annual exempt amount ― where possible relieve losses in such a way as to preserve these allowances
• timing ― consider whether it is more important to have relief earlier, which may generate a cash repayment, or to obtain relief at the highest marginal rate

Loss relief claims

Claims for the following loss reliefs must be submitted to HMRC by the first anniversary of 31 January following the year in which the loss arose (ie 31 January 2023 for a loss incurred in the 2020/21 tax year):

• income for the same and / or preceding year(s)
• trading loss against capital gains

Claims to carry losses forward must be made within four years after the end of the tax year in which the loss arose (ie 5 April 2025 for a loss incurred in the 2020/21 tax year). In practice, deducting a brought forward loss in a subsequent year’s tax return constitutes making a claim.

The claims are usually made on the white space of the tax return for the year of the loss, but a stand-alone claim can also be made by writing to HMRC. The claims are not mandatory and the taxpayer can decide not to make a claim.

Losses can be carried forward against future profits 

Losses are carried forward without time limit. Losses must be offset against the first available profits and will continue to be relieved until the losses are exhausted.

Losses relieved in this way cannot be restricted, for example to preserve personal allowances.

HMRC has produced the following helpsheet to help with trading losses:

Relief for trading losses (Self Assessment helpsheet HS227) – GOV.UK (www.gov.uk)