Income Tax Losses:Guide for Self-Employed and Sole Traders
What Are Income Tax Losses?
An income tax loss happens when your allowable business expenses are more than your income during the tax year. For example, if your business earned £20,000 in the year but your total expenses were £25,000, you’ve made a £5,000 trading loss.
These losses aren’t just bad news — they can be useful. HMRC allows you to use these losses in different ways to reduce your tax bill.
Who Can Claim Income Tax Losses?
If you are self-employed, a sole trader, or in a partnership, you can claim income tax losses. Limited companies have different rules, so this blog focuses on individuals and small businesses taxed through Self Assessment.
Common Reasons for Making a Loss
Making a loss is not unusual, especially in the early stages of a business. Some of the common reasons include:
- High start-up costs
- Buying equipment or tools
- A quiet year with low customer demand
- Unpaid invoices or bad debts
- Business disruption (e.g. illness, market changes)
Whatever the reason, it’s important to report losses correctly and understand how to make use of them.
Have You Made Any Income Tax Losses in the Year 2025–2026?
If you’re self-employed or a sole trader and your business made a loss in the 2025–2026 tax year, you might be able to reduce your overall tax bill or even get a refund. This is known as income tax loss relief.
A trading loss happens when your business expenses are higher than your income. For example, if your business earned £18,000 and your allowable expenses were £22,000, you’ve made a £4,000 loss. But this loss doesn’t have to go to waste. HMRC lets you use it in different ways to lower your tax.
Here are your main options for 2025–2026:
Set Off Against Other Income: If you also earned money from a job, property, or pension, you can use the loss to reduce that income. This is sometimes called “sideways relief.” However, there’s a cap: you can claim the greater of £50,000 or 25% of your adjusted total income for the tax year.
Carry the Loss Back: You can carry the loss back one year to 2024–2025. This means you may get a tax refund for tax you’ve already paid. Claims must be made within one year from 31 January following the loss-making year (so by 31 January 2027 for a 2025–2026 loss).
Carry Forward the Loss: If you have no other income now, you can carry the loss forward indefinitely to reduce future business profits from the same trade. There’s no time limit on carrying losses forward, and they’re not subject to the same cap as sideways relief.
Terminal Loss Relief: If you’re closing your business in 2025–2026, you can claim relief against profits made in the last 3 years (starting from the year before the final 12 months of trading). The trade must have ended in the tax year the loss arises, and you must inform HMRC that this is a terminal loss relief claim.
Early-Years Relief: If your business is in its first four years of trading, you may be able to carry losses back up to three years before the loss-making year against other income, providing additional flexibility for new businesses.
Losses made in 2025–2026 must be claimed through your Self Assessment tax return. Be sure to include the correct details and choose the option that saves you the most tax. If you’re not sure, it’s best to speak to a qualified accountant.
How to Use Income Tax Losses
HMRC gives you a few options when it comes to using your trading losses. You can choose the method that gives you the best tax outcome.
1. Set Off Against Other Income in the Same Year
You can use your trading loss to reduce other income you earned in the same tax year. This could be:
- Employment income
- Pension income
- Rental income
Example:
If you made a £6,000 loss from self-employment and earned £20,000 from a part-time job, you can deduct the £6,000 loss from your salary. You’ll only pay income tax on £14,000.
2. Carry Back Losses to the Previous Year
You can also carry the loss back one year and offset it against any taxable income you had then.
Example:
You made a £5,000 trading loss this year but had a £25,000 profit last year. You can carry the loss back and claim a tax refund on part of last year’s tax.
This option can be especially helpful if you had a higher income in the previous year and paid more tax.
3. Carry Forward Losses to Future Profits
If you don’t have any other income now or in the previous year, you can carry the loss forward to offset against future profits from the same trade.
Example:
You made a £4,000 loss this year and no other income. Next year, you make £10,000 profit. You can deduct £4,000 and only pay tax on £6,000.
This is useful if you expect your business to pick up in the coming years.
4. Terminal Loss Relief
If you’re closing your business, you may qualify for terminal loss relief. This lets you carry the loss back up to three years from when the business ends.
Example:
You close your business in 2024–25 and made a £7,000 loss. You can carry it back against profits from 2021–22, 2022–23, and 2023–24.
This can help you get back some of the tax you’ve already paid.
Special Rules for New Businesses
HMRC offers special help if you made a loss in any of your first four years of trading.
You can carry the loss back up to three years on a first-in, first-out basis, starting with the earliest year. This can be a big help to new businesses and could result in a tax refund.
Example:
If you started your business in 2022 and made a loss in your second year, you can carry it back to offset income as far back as 2019.
Restrictions and Limits You Should Know
While income tax losses can help lower your tax bill, there are some limits:
- You can only claim a maximum of £50,000 or 25% of your total income, whichever is higher, when setting losses against general income.
- The losses must be from a genuine trade run with the aim of making a profit.
- HMRC might disallow your claim if your business is considered a hobby or if it’s not run commercially.
Always keep good records to show that your business is trading with a clear profit motive.
How to Claim Income Tax Loss Relief
You usually claim relief for trading losses on your Self-Assessment tax return. Here’s how:
- Fill in the self-employment pages of the tax return.
- Include the amount of loss in the appropriate box.
- Add a note in the “additional information” section to explain how you want to use the loss — same-year, carry-back, or carry-forward.
If you’re unsure, it’s a good idea to speak to a tax adviser. They can help you choose the best option and avoid making mistakes.
Example Scenarios
Here are a few simple examples to show how income tax losses work:
Scenario 1 – Same Year Relief:
Jane is a self-employed artist. She made a £3,000 loss but earned £12,000 from a part-time job. She reduces her taxable income to £9,000 and pays less tax.
Scenario 2 – Carry Back Loss:
Ali started a business and made a £4,000 loss in 2023–24. He had a good job in 2022–23 earning £30,000. He carries back the loss and claims a tax refund for part of last year’s tax.
Scenario 3 – Carry Forward Loss:
Sophie made a £2,500 loss in 2022–23. In 2023–24, she earns £8,000 profit. She uses her old loss to reduce this year’s taxable income to £5,500.
When to Get Professional Advice
While many people can manage their own taxes, income tax losses can sometimes get tricky — especially if:
- You’ve made losses in more than one year
- You have multiple types of income
- You’re unsure which relief gives you the best benefit
Getting advice from a qualified accountant or tax adviser can help you avoid mistakes and make the most of your losses.
Final Thoughts
If you’re self-employed or a sole trader and have made a loss, don’t ignore it. Income tax losses can reduce your tax bill, or even get you a refund. HMRC provides several ways to claim relief, whether you want to use the loss now or in the future.
Always keep proper records, file your tax return correctly, and seek help if needed. Making a loss doesn’t have to be a setback — it can actually be a useful tax-saving tool.
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