How does a trading loss reduce my income tax bill?

Full answer

**Trading losses: the options** If you are self-employed or run a partnership and make a loss in a tax year, you have several relief options under the Income Tax Act 2007: **Option 1: Sideways relief (current year)** Offset the loss against any other income in the same tax year (salary, rental income, dividends, etc.). This is claimed on your Self Assessment return. **Option 2: Carry back** Carry the loss back to the previous tax year and offset it against total income of that year. This can generate a tax refund for the prior year. **Option 3: Carry forward** Carry the loss forward indefinitely and offset it against future trading profits from the same trade. This is automatic (no claim required) but can only be used against profits from the same trade. **Option 4: Early years relief** In the first four years of a new trade, losses can be carried back three years (rather than one) against total income — a significant advantage for new businesses. **Example: Sarah, freelance designer** Sarah earns £30,000 salary and makes a £15,000 self-employment loss in 2025/26. - Sideways relief: £15,000 loss offset against £30,000 salary = £15,000 taxable income - Tax saving: £15,000 × 20% = **£3,000 refund** (salary tax reduces) - Without relief: tax on £30,000 − £12,570 = £17,430 × 20% = £3,486 - With relief: tax on £15,000 − £12,570 = £2,430 × 20% = £486 **Losses from non-active trades** Since 2013, income tax loss relief from non-active trades (where the taxpayer works less than 10 hours/week) is capped at £25,000 per year or 25% of adjusted total income, whichever is higher. Active traders are not subject to this cap. **Restriction** You cannot choose to use only part of a loss in sideways relief — it is all-or-nothing for the current year claim. Carry forward is more flexible.

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