UK Trading Loss Relief: Sideways Relief, Carry-Back and Terminal Loss 2026

Understanding Trading Loss Relief

Running a business is not always profitable. Economic downturns, failed product launches, unexpected costs, or simply the early years of a new venture can produce losses rather than profits. The UK tax system acknowledges this reality and provides several mechanisms to obtain tax relief on trading losses -- some immediately, others over time.

For self-employed individuals and partnerships, the relevant rules are in the Income Tax Act 2007 (ITA 2007). For companies, the rules are in the Corporation Tax Act 2010 (CTA 2010). The two regimes differ in important ways, though both allow losses to be carried forward, sideways, or in limited cases carried back.

This guide focuses primarily on the self-employed individual rules, with a section on the company position.

What Counts as a Trading Loss?

A trading loss is the loss from a trade computed under the trading income rules -- broadly, income less allowable business expenses. It does not include:

• Capital losses (losses on disposal of assets -- these are CGT losses, governed by separate rules)
• Non-trade losses (rental losses, losses from employment)
• Losses from certain non-commercial activities

To use any form of trading loss relief, the business must be run on a commercial basis with a view to profit. HMRC can challenge loss claims where a business has operated at a continuous loss for many years without any realistic prospect of profit -- particularly in hobby activities that have been given a business label.

Sideways Relief: Current Year and Prior Year

Current Year Sideways Relief

Under section 64 of ITA 2007, a self-employed individual can set a trading loss against their total income in the same tax year -- earnings, rental income, savings interest, dividends, pensions. This is called sideways relief.

Example: A self-employed architect earns GBP30,000 from employment (after leaving a firm mid-year) and makes a GBP25,000 loss from their new sole trader practice. They can set the GBP25,000 loss against the GBP30,000 employment income, reducing taxable income to GBP5,000.

Sideways relief is particularly valuable when:

• The individual has significant other income that would otherwise be taxed at 40% or 45%
• The loss is large relative to expected future trading profits (so carry-forward would be slow to use)
• The individual wants to recover tax quickly rather than waiting for future profitable years

Prior Year Sideways Relief

If there is insufficient other income in the loss year to absorb the loss, any unused amount can be carried back to the immediately preceding tax year and set against income of that year (section 64(2) ITA 2007).

Example: In 2025/26, a freelance journalist made GBP40,000 of income. In 2026/27, they make a GBP30,000 trading loss and have no other income. They claim sideways relief against 2025/26 income, potentially generating a repayment of tax already paid.

The GBP50,000 Annual Cap

Since 2013, sideways relief against other income is subject to a cap. The maximum loss that can be claimed sideways in any one tax year is the higher of:

• GBP50,000, or
• 25% of the individual's adjusted total income for that year

Adjusted total income includes income from all sources before loss relief but after deducting gross pension contributions.

Example: An individual has salary income of GBP300,000 and makes a trading loss of GBP120,000. The cap is 25% of GBP300,000 = GBP75,000. So GBP75,000 can be relieved sideways; the remaining GBP45,000 must be carried forward.

For most self-employed individuals with modest other income, the GBP50,000 flat cap is the binding constraint. Losses above GBP50,000 in a year where other income is below GBP200,000 must be carried forward.

Early Years Loss Relief

New businesses often make losses in their first few years. The tax system provides additional relief for losses made in the first four years of trading (section 72 ITA 2007).

Early years losses can be carried back three years (rather than one) against general income -- not just trading income -- of those years. Carry-back is on a LIFO basis: the most recent of the three prior years is relieved first.

Example: A self-employed graphic designer starts trading in 2026/27 and makes a loss of GBP15,000 in their first year. They have employment income from 2023/24, 2024/25, and 2025/26. They can carry the loss back to each of those years (starting with the most recent, 2025/26) to recover tax paid on employment income.

This provision is particularly valuable for people who leave employment to start a business. The taxes paid on prior employment income can be partially recovered through early years loss relief.

The Commercial Basis Requirement

Early years loss relief requires that the trade be conducted on a commercial basis throughout the loss period. HMRC pays particular attention to claims in the first four years of trading, especially for activities with a lifestyle element (farming, horse training, art, hospitality).

Carry-Forward of Unused Losses

If a trading loss (or part of it) is not relieved sideways or carried back, it is automatically carried forward and set against future profits from the same trade (section 83 ITA 2007). Carry-forward losses can be used without any cap and without any time limit.

The disadvantage of carry-forward is timing: the relief is deferred until the business becomes profitable again. For a business making persistent losses, this could mean relief is delayed by many years or lost entirely if the business never becomes profitable.

Carry-forward losses must be set against the first available profits. They cannot be deliberately held back to benefit from a higher rate in a future year.

Terminal Loss Relief

When a self-employed business ceases trading, terminal loss relief provides the most generous carry-back available in the UK tax system.

Under section 89 of ITA 2007, a terminal loss -- broadly the loss in the final twelve months of trading -- can be carried back and set against profits from the same trade in the three years ending with the last year of trading (as opposed to the normal one-year carry-back).

Carry-back is on a LIFO basis: the most recent year's profits are offset first.

Example: A solicitor retires on 31 December 2026. Their final twelve months of trading show a loss of GBP40,000. Their profits in the three preceding years were:

• 2025/26: GBP15,000
• 2024/25: GBP25,000
• 2023/24: GBP10,000

Terminal loss relief can be applied as follows: GBP15,000 against 2025/26 (full offset), GBP25,000 against 2024/25 (full offset), and the remaining tax is fully recovered. The solicitor receives repayments of the income tax originally paid on those profits.

Calculating the Terminal Loss

The terminal loss is calculated by adding together:

• The loss in the final tax year of trading (if any)
• The unrelieved loss from the twelve months before the cessation

Where the final year of trading is a short year (because the business ceases mid-tax-year), the calculation is more complex and a tax adviser should be consulted.

Losses in Limited Companies

The rules for company trading losses differ from the individual rules, though the broad categories (sideways, carry-back, carry-forward) are similar.

Current Period and Prior Period Relief

A company can set a trading loss against its total profits (including capital gains) in the same accounting period, or carry the loss back to the immediately preceding accounting period (not twelve months -- one accounting period).

Carry-Forward

From April 2017, companies can carry forward losses more flexibly -- against total profits rather than only profits from the same trade. However, the use of carried-forward losses is subject to a GBP5 million deductions allowance per company (or per group) plus a 50% restriction on profits above GBP5 million. This prevents large companies from eliminating tax entirely through historic losses.

Group Relief

Where a UK company is part of a group (broadly, companies with a 75% common ownership), trading losses can be surrendered to other profitable group members in the same accounting period. This allows the profitable group entity to offset the loss against its profits, reducing the group's overall tax bill.

Three-Year Carry-Back for COVID Losses

It is worth noting that the temporary three-year carry-back for companies was introduced for accounting periods ending between 1 April 2020 and 31 March 2022 in response to COVID. This is no longer available and losses in 2026/27 revert to the normal one-year carry-back.

Interaction with the Personal Allowance

When sideways loss relief is claimed, it reduces total income. This can affect several other calculations:

• Personal Allowance: If income falls below GBP12,570, the Personal Allowance is not fully used -- it cannot be carried forward. Loss relief that wastes the Personal Allowance can be suboptimal.
• Higher Rate Tax Saving: Loss relief against employment income taxed at 40% is worth 40p per pound. Against savings income taxed at 20%, it is worth only 20p per pound.

In some cases, it may be more tax-efficient to not claim sideways relief and instead carry the loss forward against future trading profits where more tax will be saved.

Practical Steps for Claiming Loss Relief

1. File a Self Assessment return for the loss year, entering the loss figure in the trading pages (SA103 or SA104)
2. Claim sideways relief on the return, specifying the current year and/or prior year allocation
3. Claim carry-back by amending the prior year return or including it in the current return with a carry-back election
4. Keep records of the loss calculation, including all business expenses and income for the year
5. Retain evidence that the trade was conducted commercially (business plans, client correspondence, invoices)

Conclusion

UK trading loss relief is a genuine safety net for self-employed individuals and companies navigating unprofitable periods. The combination of sideways relief (capped at GBP50,000), prior year carry-back, early years three-year carry-back, terminal loss three-year carry-back, and indefinite carry-forward provides multiple routes to recover tax relief.

The key is making the right claim at the right time. Claiming sideways relief wastes the Personal Allowance if total income is low. Deferring to carry-forward may be better if the business will soon be profitable and in a higher rate band. And terminal loss relief offers the best opportunity of all -- but only arises when the business finally closes.

Professional advice is particularly valuable when losses are large, when multiple years are involved, or when the interaction with the Personal Allowance, pension contributions, or other reliefs complicates the picture.