Glossary · UK
What is Trading Loss Relief?
The set of reliefs allowing a sole trader or partner who makes a loss in their business to offset it against other income or gains, carry it back against earlier profits, or carry it forward against future profits from the same trade.
Full Definition
Trading loss relief is the collective name for several routes HMRC provides for a self-employed sole trader or partner to make use of a loss made in their trade, rather than simply losing the benefit of the expense that generated it. The most flexible option, sideways loss relief, lets the trader set the loss against their other taxable income (employment income, property income, or savings income) in the same tax year, the previous tax year, or both, potentially generating an Income Tax refund even though the loss itself arose in the business. Alternatively, the loss can be carried forward and set against future profits of the same trade, with no time limit, which is the default treatment if no other claim is made and is often the only realistic option for a business with no other income to offset against. Special extended reliefs apply in particular circumstances: losses made in the first four tax years of a new trade can be carried back three years and set against other income of those earlier years (early trade losses relief), which can be valuable for someone who left employment to start a business and made a loss in the opening years. Terminal loss relief applies to losses made in the final 12 months before a trade permanently ceases, allowing the loss to be carried back up to three years against profits of the same trade, on a last-in-first-out basis. Worked example: a sole trader with a £15,000 loss in 2026/27 and £40,000 of PAYE employment income earned partway through the same tax year could claim sideways relief to reduce their taxable income to £25,000, generating a repayment of tax already deducted at source, rather than waiting to offset the loss against uncertain future trading profits. Sideways relief is subject to an annual cap for relief against non-trading income: the greater of £50,000 or 25% of the claimant's adjusted total income, meaning very large losses may need to be spread across sideways relief, carry-back, and carry-forward claims. Claims must be made within strict time limits -- generally by the first anniversary of 31 January following the tax year of the loss -- and a trader must be carrying on the trade on a commercial basis with a view to profit to qualify, which is why HMRC scrutinises loss claims from hobby businesses or activities not run to make a genuine profit.