UK Trading Loss Relief 2026: Carry Back, Set-Off and Terminal Loss Options

A trading loss is never good news, but the UK tax system offers meaningful relief options that can reduce the sting -- provided you claim them correctly and in the right order. Whether you are a self-employed individual or a limited company, understanding which relief applies, when to claim it, and how the timing of your claim affects your tax repayment can make a significant cash flow difference.

Understanding Trading Loss Relief: The Basics

A trading loss arises when a business's tax-adjusted trading expenses exceed its trading income in a given period. Tax adjustment means starting with the accounting profit or loss and making the necessary adjustments for non-deductible expenses, capital allowances, and other required modifications.

Once a loss is established, the business has choices about how to relieve it. The choices differ slightly between income tax (for sole traders and partnerships) and corporation tax (for limited companies), but the broad options are:

1. Set against total income of the same period
2. Carry back to the immediately preceding period
3. Carry forward against future profits of the same trade
4. Group relief (companies only)
5. Terminal loss relief on cessation

Not all options are available in all circumstances, and some must be claimed in a specific order. The time limit for making claims is typically two years from the end of the loss-making period.

Same-Year Set-Off: The Quickest Route to Relief

For income tax, a self-employed person making a trading loss in 2026/27 can claim to set the loss against their total income for that year under Section 64 ITA 2007. Total income includes:

• Employment income (if they also have a job)
• Rental income
• Savings and investment income
• Any other taxable income

This claim is all-or-nothing -- you cannot choose to set only part of the loss against income. If the loss exceeds total income, the excess can be set against capital gains of the same year (after other CGT reliefs), and any remaining loss can then be carried forward or back.

The same-year set-off often generates the fastest cash repayment, since you recover tax already paid through PAYE or in a previous year's Self Assessment payment. For a sole trader earning £60,000 from employment and making a £20,000 trading loss, the net effect is taxable income of £40,000 -- recovering approximately £4,000 of income tax (at 20%) and some NI.

One-Year Carry-Back

If you do not want to use the loss in the same year (or have exhausted your same-year income), you can carry the loss back to the immediately preceding tax year. For income tax, this means the 2026/27 loss can be carried back to 2025/26. For corporation tax, the loss is carried back to the immediately preceding accounting period of equal length.

The carry-back claim is made on the Self Assessment return for the loss year, and any resulting repayment comes from the earlier year's tax assessment. This is valuable when income in the prior year was higher -- for example, a self-employed person who had a profitable 2025/26 and then suffered a loss year in 2026/27 can recover the tax paid on 2025/26 profits.

The Covid extension has ended: During the pandemic, HMRC temporarily allowed losses for 2020/21 and 2021/22 to be carried back three years rather than one. This extension has now expired. Any losses from those years that were not claimed under the extended carry-back cannot now be claimed under it retrospectively.

Carry Forward: Indefinite Relief Against the Same Trade

If carry-back is not possible or not desirable, losses can be carried forward against future profits of the same trade without any time limit. For income tax, Section 83 ITA 2007 requires that carried-forward losses be set against the first available profits of the same trade in future years -- you cannot skip a profitable year and carry the loss further forward.

For corporation tax, the rules are similar: pre-April 2017 carried-forward losses must be set against the first available trading profits. Post-April 2017 losses (under the new rules) can be used more flexibly -- set against total profits (not just trading profits) and potentially deferred -- but are subject to the 50% restriction for large companies with annual deductions exceeding £5 million.

For most SMEs, the carry-forward mechanism works straightforwardly: the loss sits on the balance sheet as an asset, reducing taxable profits when the trade returns to profitability.

Terminal Loss Relief: The Most Generous Carry-Back

When a trade permanently ceases -- the business closes down, is sold, or otherwise stops trading -- a different and more generous relief applies. Terminal loss relief allows the loss in the final 12 months of trading (combined for income tax, or in the final accounting period for corporation tax) to be carried back three years rather than one.

For income tax, the terminal loss period is the last year of trading and, if needed, any unused loss from the penultimate year that forms part of the "terminal loss" calculation. The combined terminal loss can be set against profits of the three tax years before the final year, going back year by year from the most recent.

This extended carry-back can generate substantial repayments for a business that was profitable in earlier years but trades at a loss in its final period. A business that ceases in 2026/27 with a terminal loss can potentially reclaim tax paid on profits from 2023/24, 2024/25 and 2025/26.

Loss Buying Restrictions

Anti-avoidance rules exist to prevent the buying and selling of companies primarily to access their accumulated tax losses. The key restriction is found in Sections 673-676 CTA 2010 (the "change in ownership" rules):

If, within three years before or after a major change in the ownership of a company, there is also a major change in the nature or conduct of the company's trade, carried-forward losses from before the ownership change cannot be used against profits generated after the change.

A "major change in ownership" is generally a change of more than 50% in the beneficial ownership of the company's shares. A "major change in the nature or conduct of trade" is assessed broadly -- it can include a shift in the types of customers served, suppliers used, methods of production, or the scale of the business.

These rules catch situations where an investor acquires a company with large tax losses and then runs a profitable business through it, using the pre-acquired losses to shelter profits that the original shareholders would never have been able to use. Even if the business being run is similar to the original trade, HMRC may challenge the use of losses if the combination of ownership and trade changes suggests the acquisition was loss-motivated.

Purchasers of companies with significant accumulated losses should always take tax advice before the transaction is completed. Post-acquisition restructuring that triggers the trade change condition can accidentally lock out losses that would otherwise have been available.

Group Relief for Companies

For limited companies within a group (broadly, companies under 75% common ownership), losses can be "group relieved" -- surrendered from one group company to another as an offset against the recipient company's taxable profits in the same accounting period.

This is particularly valuable when some group companies are profitable and others are loss-making. Rather than carrying the loss forward in the loss-making company (where it generates no immediate benefit), the loss can be used immediately to reduce the tax bill in a profitable group member.

The surrendering company gives up the loss permanently -- it cannot carry forward an amount that has been group relieved. The recipient company's tax liability is reduced by the tax rate applicable to it (currently 25% main rate or 19% small profits rate, depending on profits).

Group relief is a same-year election. It cannot bridge between accounting periods in the same way as carry-back or carry-forward. Careful coordination of group accounting periods -- ensuring they end on the same date where possible -- maximises the available relief.