Answers · UK 2025/26

Can I carry back a trading loss to get a tax refund from an earlier year?

Sole traders and partners can generally carry back a trading loss to set against total income of the previous tax year, generating a tax refund, and in the tax year a trade ceases, an extended terminal loss relief allows losses to be carried back against profits of the same trade from the preceding three tax years instead.

Last updated: 1 July 2026Last reviewed: 1 July 2026How we verify

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Trading loss relief lets self-employed individuals use a loss made in one tax year to reduce their tax bill in another year, and the carry-back rules are one of several options available alongside carrying a loss forward or setting it against other income in the same year. **The standard one-year carry-back** Where a sole trader or partner makes a trading loss, they can normally choose to carry that loss back and set it against their total income of the immediately preceding tax year, which can generate a repayment of tax already paid for that earlier year -- this is often useful where the earlier year had significant taxable income and the loss-making year has little or none to absorb the loss against. **Order of claims and time limits** A claim to carry back a trading loss must normally be made within one year of the 31 January filing deadline for the tax year of the loss, and HMRC generally expects any available claim against income of the SAME tax year as the loss (or the earlier carry-back) to be made before losses are simply carried forward against future profits of the same trade -- getting the order and timing of claims right can materially change how quickly relief is obtained. **Worked example** A self-employed consultant has a strong year with taxable profit of £45,000, paying a substantial amount of Income Tax and Class 4 National Insurance. The following year, a major client is lost and the same business makes a trading loss of £15,000. By carrying that £15,000 loss back against the prior year's £45,000 profit, taxable income for the earlier year is reduced to £30,000, and HMRC repays the tax and Class 4 NIC originally overpaid on the £15,000 that is now relieved. **Terminal loss relief when a trade ceases** When a sole trader or partnership permanently stops trading, a special extended carry-back applies to a loss made in the final 12 months of trading (the "terminal loss"): rather than only being able to carry the loss back one year, it can be carried back and set against profits of the SAME trade from the three tax years immediately before the year of cessation, starting with the most recent year first -- this recognises that a business winding down often cannot generate future profits to use ordinary loss carry-forward relief against. **Carry-forward remains an alternative** Where carrying a loss back is not available or not the most valuable option (for example, if earlier years had little taxable profit to offset), losses can instead be carried forward and set against future profits of the same trade, with no time limit on how long they can be carried forward, though this delays getting any cash benefit until profits return. **Practical tip** If your self-employed business makes a loss, compare carrying it back against the prior year, setting it against other income in the same year, and carrying it forward, since the right choice depends heavily on your income pattern across those years -- and if you are permanently ceasing trading, check whether the more generous three-year terminal loss carry-back applies to your final year's loss.