UK Trading Loss Relief 2026/27: Carry Back vs Carry Forward

What Is a Trading Loss and When Does It Arise?

A trading loss arises when allowable business expenses exceed trading income in a tax year. For sole traders and partners this is calculated on the self-employment pages of the Self Assessment return. The loss figure is after capital allowances -- so if you claimed the Annual Investment Allowance on equipment, that deduction feeds into the loss calculation.

Losses are not unusual. A new business investing heavily in stock, equipment, and marketing may run at a loss for several years before turning profitable. An established business may suffer a bad year due to a contract falling through, rising costs, or sector downturns. Whatever the cause, HMRC provides structured reliefs that let you use the loss to reduce your tax bill -- either now or in future years.

Before choosing your relief route, it is worth running the numbers carefully. Use the CalcHub Income Tax Calculator to model how different loss-relief strategies affect your overall liability, especially if you have mixed sources of income such as PAYE earnings alongside self-employment.

Option 1: Set the Loss Against Other Income (Same Year)

The most immediate use of a trading loss is to set it against other income in the same tax year under Section 64 of the Income Tax Act 2007. Other income includes:

• Employment income (PAYE earnings)
• Rental income from property
• Savings interest and dividends
• Pension income

Say you earned GBP 35,000 from employment in 2026/27 and your self-employed trade made a loss of GBP 10,000. Setting the loss against your employment income reduces your taxable income to GBP 25,000. After the GBP 12,570 Personal Allowance, you pay 20% basic rate on GBP 12,430 -- a tax bill of GBP 2,486. Without the relief you would have paid 20% on GBP 22,430 (GBP 4,486) -- a saving of GBP 2,000.

One important constraint: you cannot restrict a same-year claim to avoid wasting the Personal Allowance. The loss must be set against income in full, even if part of it falls within the GBP 12,570 tax-free band. This wastes the allowance and generates no extra saving. For this reason, it sometimes makes more sense to carry the loss back or forward instead.

Option 2: Carry Back the Loss (1 Year -- or 3 Years for New Trades)

If you do not have enough other income in the current year to absorb the loss, or if you earned more in the previous year, carrying back can generate a cash repayment from HMRC.

Standard carry-back (established trades)

An established trader can carry a loss back one year -- to 2025/26 if you are making a 2026/27 loss claim. You offset the loss against profits from the same trade in that earlier year, reducing the profit on which tax was charged. HMRC then repays the overpaid tax. This can be a valuable source of cash flow for a business in difficulty.

Early-trade losses relief (new trades, first 4 years)

A trader who started in business within the four tax years before the loss year qualifies for early-trade losses relief under Section 72 ITA 2007. This allows the loss to be carried back up to three years. A loss made in 2026/27 by a trader who started in 2023/24 or later could therefore be set against profits (or other income) from 2023/24, 2024/25, and 2025/26 -- in that order, earliest year first.

This extended window is particularly powerful for entrepreneurs who were employed before going self-employed and paid substantial Income Tax in earlier years. Carrying back to a year when you had high PAYE income can unlock a large repayment.

COVID-19 note: Between 2020 and 2022, temporary legislation allowed trading losses to be carried back three years for all traders, not just new ones. That measure ended on 5 April 2022 and does not apply to 2026/27 losses.

Option 3: Carry the Loss Forward Indefinitely

Under Section 83 ITA 2007, any unused trading loss can be carried forward without limit and set against future profits from the same trade. There is no time limit -- a loss from 2026/27 can still be used in 2036/37 if the trade has not yet returned enough profit to absorb it.

This option is particularly useful if:

• You have little or no other income to absorb the loss today
• You do not want to waste the Personal Allowance by setting the loss against income in the GBP 0 to GBP 12,570 band
• You expect the business to be significantly more profitable in future years

The main downside is timing. You do not get the tax relief until profits materialise. If you need cash now, a carry-back claim that produces an immediate repayment is usually preferable.

Under post-2017 rules, losses that arose before April 2017 and certain restricted losses can only be carried forward against profits of the same trade. Losses arising from April 2017 onward may, in some cases, be set against other income in a carry-forward year -- but this flexibility is primarily aimed at larger companies rather than sole traders.

Interaction With the Personal Allowance and Higher-Rate Tax

The GBP 12,570 Personal Allowance means losses only deliver a tax saving to the extent they reduce income above that threshold. A loss claim that pulls your income from GBP 15,000 down to GBP 9,000 only saves tax on GBP 2,430 -- the amount above the allowance before the claim.

At the higher end of the income scale, the picture is different. If you earn GBP 120,000 from employment and make a GBP 20,000 trading loss in the same year, setting the loss against your income brings total income to GBP 100,000. This matters enormously because the Personal Allowance taper starts at GBP 100,000 -- above that, GBP 1 of allowance is withdrawn for every GBP 2 of income, creating an effective 60% marginal rate between GBP 100,001 and GBP 125,140. Reducing your adjusted net income to exactly GBP 100,000 restores the full GBP 12,570 allowance and can save an additional GBP 2,514 in tax on top of the direct loss relief.

Use the CalcHub Self-Employed Tax Calculator to model how a trading loss interacts with your other income sources across all tax bands.

How to Claim -- Self Assessment Deadlines

Loss relief claims are made on the Self Assessment tax return (SA100) and the self-employment supplementary pages (SA103). The key deadlines are:

• Online filing deadline: 31 January following the end of the tax year (so 31 January 2028 for 2026/27)
• Carry-back amendment deadline: You can amend a return up to 12 months after the online filing deadline. For older years, you may need to write to HMRC.
• Overpayment relief claim (if you missed the amendment window): Within 4 years of the end of the tax year -- so 5 April 2031 for a 2026/27 claim.

If the loss arose in a partnership, each partner claims relief individually on their own return based on their profit-sharing ratio.

Terminal Loss Relief

If you cease trading, any losses in the final 12 months of the business -- called terminal losses -- can be carried back three years against profits from the same trade. This applies regardless of how long the business has been trading, making it a valuable relief for anyone closing down a struggling enterprise. The terminal loss period is calculated from the date of cessation back 12 months, which can straddle two tax years.

Common Mistakes to Avoid

Several errors frequently appear on Self Assessment returns related to loss claims:

1. Forgetting to carry forward unused losses. If you set a loss against other income but the loss exceeds that income, the remainder must be carried forward. Do not leave it off the return.
2. Missing the carry-back deadline. Amendments have a fixed window -- act promptly.
3. Claiming relief on non-allowable expenses. A loss that includes disallowable costs (entertaining clients, personal use of a car, penalties) will be challenged by HMRC. Ensure your loss figure uses only allowable expenses.
4. Not recording losses on your return. Even if you cannot use a loss in the current year, you must report it on your Self Assessment return to preserve it for carry-forward.

The CalcHub Self-Employed Expense Tracker and Tax Calculator can help you build an accurate loss figure before filing.