Sole Trader Trading Loss Relief: How to Claim Tax Relief on Business Losses

Introduction

Trading conditions aren’t always predictable, and sometimes sole traders end up making a loss instead of a profit. The good news is that trading losses can often be used to reduce your tax bill — but only if you claim the relief correctly.

There are several ways to claim relief for a trading loss, and the best option depends on your income, tax position, and future profit expectations.

Do You Need to Claim Trading Loss Relief?

Yes — trading loss relief is not automatic. You must make a claim through your tax return (or by contacting HMRC), otherwise the relief will not be applied.

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

If you have other income — such as:

• employment wages

• rental income

• savings or investment income

…you may be able to set your trading loss against your income in:

• the same tax year, and/or

• the previous tax year

You can choose either year, or both, and claims can be made in any order depending on what gives the best result.

Important point

You cannot make a partial claim. This means you can’t use just part of the loss to protect your personal allowance.

If using the loss would waste your personal allowance, you may want to consider another option instead.

Example

Joe is self-employed as a decorator. In 2024/25, he made a trading loss of £12,300. He also has a part-time job earning £14,000. In 2023/24, Joe’s total income was £42,000.

• If Joe uses the loss in 2024/25, most of his personal allowance would be wasted.

• However, if he uses the loss against 2023/24 income, he reduces taxable income to £29,700 and saves £2,460 in tax.

Option 2: Use Any Remaining Loss Against Capital Gains

If you’ve already set the loss against income but still have unused losses, you may be able to apply the remaining balance against capital gains in the same tax year.

This may reduce or remove your Capital Gains Tax Annual Exempt Amount — but depending on your figures, it can still be beneficial.

Option 3: Carry the Loss Forward Against Future Trading Profits

In some cases, claiming relief immediately isn’t the most tax-efficient option.

If setting the loss against other income would waste personal allowances, it may be better to carry the loss forward and use it against future profits from the same trade.

Key rule:

Carried-forward losses must be used against the first available profits of that trade.

Extra Relief for Opening and Closing Years

Special rules apply when a business is starting or closing.

Losses in the first four years

If the loss occurs within the first four years of trading, it can be set against income from the previous three tax years, starting with the earliest year first.

Terminal loss (final 12 months of trading)

If a loss occurs in the final 12 months of a business (called a terminal loss), it can be set against profits from the same trade in:

• the same tax year, and

• the previous three tax years

Relief is applied against the most recent year first.

Loss Relief Cap

In some cases, loss relief is restricted. The amount of relief you can claim in a tax year may be capped at the higher of:

• £50,000, or

• 25% of your adjusted net income

Final Thoughts

Trading losses can provide valuable tax relief, but the best route depends on your wider income and your future plans.

If you’re unsure which option gives the greatest benefit, professional advice can help ensure you claim relief in the most tax-efficient way.

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