Running a self-employed business comes with financial challenges, and not every trading year will generate a profit. Rising operating costs, reduced sales, unexpected expenses, and difficult economic conditions can sometimes result in a business making a loss.
However, making a trading loss does not necessarily mean you have to wait until your business becomes profitable again to benefit from tax relief.
Under certain circumstances, self-employed individuals and sole traders may be able to offset trading losses against other taxable income, potentially reducing their Income Tax liability or generating a tax repayment.
This is commonly known as sideways loss relief.
At Business Management Consultation (BMC), we help self-employed individuals, sole traders, and business owners understand their tax position, identify available reliefs, and ensure legitimate business losses are treated correctly.
INSERT PHOTO HERE
What Is Sideways Loss Relief?
Sideways loss relief is a UK tax relief that allows eligible individuals to offset qualifying trading losses against their general income.
If you operate a self-employed business and incur a genuine commercial trading loss, you may be able to claim that loss against income received during the same tax year or the preceding tax year.
Other income may include:
- Employment income.
- Profits from another self-employed business.
- Pension income.
- Rental property income.
- Certain other taxable income.
This relief can be particularly valuable for individuals who operate a business alongside employment or have additional sources of taxable income.
Rather than carrying the trading loss forward to offset future business profits, sideways loss relief may provide an immediate tax benefit.
How Does Sideways Loss Relief Work?
When a self-employed business makes a trading loss, the individual may have several options for claiming tax relief.
Under the sideways loss relief rules, a qualifying trading loss can potentially be offset against general income for:
- The tax year in which the loss arises.
- The immediately preceding tax year.
The claim must satisfy the relevant HMRC conditions and statutory restrictions.
Where a valid claim is made, the trading loss reduces the income against which it is set, potentially lowering the individual’s Income Tax liability.
If Income Tax has already been paid through PAYE or Self Assessment, the claim may result in a tax repayment.
However, the availability and value of the relief depend on the individual’s circumstances, the type of trade, and the nature of the loss.
Example: Using a £20,000 Trading Loss Against Employment Income
Consider James, who works as an employee while operating a separate self-employed business.
During the 2025/26 tax year, James receives:
- Employment income: £50,000.
- Self-employed trading loss: £20,000.
Assuming James qualifies for sideways loss relief, he may be able to offset the £20,000 trading loss against his employment income.
His income position would then be:
- Employment income before loss relief: £50,000.
- Trading loss claimed: £20,000.
- Income after loss relief: £30,000.
The claim could significantly reduce James’s Income Tax liability.
If Income Tax has already been deducted from his employment income through PAYE, he may become entitled to a tax repayment.
The actual saving depends on his tax rates, allowances, other income, and personal circumstances. The relief does not automatically generate a repayment equal to the amount of the trading loss.
Can You Claim Sideways Loss Relief Against PAYE Income?
Yes. Where the relevant conditions are satisfied, a self-employed individual may be able to offset qualifying trading losses against employment income.
This can be particularly beneficial for individuals who:
- Work full-time while operating a separate business.
- Have recently started self-employment.
- Operate a business alongside part-time employment.
- Have experienced an unexpected trading loss.
- Receive employment income while developing a new commercial activity.
For example, an individual who earns £45,000 through employment but incurs a £10,000 qualifying trading loss may be able to reduce the income subject to Income Tax by claiming the loss.
Where tax has already been deducted through PAYE, a repayment may be available.
Can Every Self-Employed Business Claim Sideways Loss Relief?
Not every business loss qualifies for sideways loss relief.
HMRC applies conditions designed to ensure that relief is available for genuine commercial trading activities rather than personal hobbies or activities that are not operated commercially.
The business must generally be conducted:
- On a commercial basis.
- With a view to making profits.
- As a genuine trade rather than a personal hobby.
- In accordance with the relevant tax legislation.
For example, someone operating a genuine retail business that experiences temporary losses may qualify for relief.
However, an individual carrying out an activity primarily for personal enjoyment without a genuine commercial profit objective may not qualify.
HMRC may examine the circumstances of the business when determining whether a claim is valid.
What Restrictions Apply to Sideways Loss Relief?
Several restrictions may affect whether a trading loss can be offset against other income.
These include:
- Non-commercial trading activities.
- Certain partnership arrangements.
- Limited participation in a business.
- Certain tax-generated losses.
- Some overseas trading activities.
- Losses arising under particular accounting arrangements.
- The general Income Tax reliefs cap.
For many taxpayers, the general cap restricts certain Income Tax reliefs to the greater of:
- £50,000; or
- 25% of adjusted total income.
The cap does not necessarily apply to every form of trading loss relief, and particular exceptions or additional restrictions may apply.
Professional advice can help establish which rules affect your circumstances.
Can You Carry Trading Losses Forward?
Yes. If you do not claim sideways loss relief, or if some of your trading loss remains unused, you may be able to carry the loss forward.
Carried-forward trading losses can generally be used against future taxable profits from the same trade.
For example:
Tax Year 2025/26
- Trading loss: £15,000.
Tax Year 2026/27
- Trading profit: £25,000.
- Loss brought forward: £15,000.
- Remaining taxable trading profit: £10,000.
This can reduce the Income Tax payable on future trading profits.
Carrying losses forward may be more beneficial where an individual expects higher business profits in future years.
However, the most appropriate treatment depends on the individual’s overall tax position.
Can You Carry Trading Losses Back?
Under the general sideways loss relief rules, qualifying trading losses may be claimed against general income of the preceding tax year.
For example, a trading loss arising during 2025/26 may potentially be claimed against qualifying income received during 2024/25.
This can be particularly beneficial where an individual paid substantial Income Tax in the previous year.
If the claim is successful, HMRC may recalculate the earlier year’s tax liability and issue a repayment.
The amount of relief available depends on the relevant income, applicable tax rules, and whether the claim satisfies HMRC requirements.
What Is Early Trade Loss Relief?
Special loss relief rules may apply to individuals who make trading losses during the early years of a new business.
Where the relevant conditions are satisfied, losses arising during the first four tax years of trading may potentially be carried back against general income of the three preceding tax years.
These rules can be particularly valuable for newly established businesses that incur significant startup costs before becoming profitable.
For example, a new business may experience losses because of:
- Initial business setup expenses.
- Marketing and advertising costs.
- Professional fees.
- Equipment and operating costs.
- Lower sales during the startup period.
However, not all expenditure automatically qualifies for tax relief, and the relevant commercial trading conditions must be satisfied.
What Is Terminal Loss Relief?
Terminal loss relief may be available where a self-employed business permanently ceases trading.
Under the relevant rules, qualifying losses arising during the final 12 months of trading may be carried back against profits from the same trade for up to three preceding tax years.
This can potentially generate a tax repayment where Income Tax was previously paid on those trading profits.
For example, a sole trader who closes their business after experiencing significant losses may be able to claim relief against profits earned during earlier trading years.
Terminal loss relief is subject to specific calculation rules and claim deadlines.
What Happens If You Use the Cash Basis?
The accounting method used by your business can affect the availability of certain loss reliefs.
Under the cash basis, income and expenses are generally recognised when money is received or paid, subject to the applicable rules.
From the 2024/25 tax year, the cash basis became the default method for many unincorporated businesses.
Importantly, the rules for cash-basis trading losses have changed, and qualifying losses may now be eligible for sideways loss relief, subject to the normal conditions and restrictions.
This means the accounting basis should be reviewed carefully before determining how a trading loss can be used.
Is It Better to Claim Sideways Loss Relief or Carry the Loss Forward?
The best option depends on your individual tax position.
Sideways loss relief may be beneficial where:
- You have substantial employment income.
- You paid Income Tax during the current or previous tax year.
- You would benefit from an immediate tax repayment.
- You do not expect significant future trading profits.
Carrying the loss forward may be preferable where:
- You expect higher trading profits in future years.
- Your current Income Tax liability is relatively low.
- Claiming sideways relief would waste valuable personal allowances.
- You want to preserve the loss for future profits from the same trade.
A detailed comparison can help determine which option provides the most appropriate tax outcome.
What Records Do You Need to Claim Trading Loss Relief?
Accurate financial records are essential when calculating and claiming business losses.
HMRC may require evidence supporting the loss and demonstrating that the business was operated commercially.
Relevant records may include:
- Business bank statements.
- Sales invoices.
- Purchase invoices.
- Expense receipts.
- Accounting records.
- Profit and loss accounts.
- Self Assessment tax returns.
- Previous tax calculations.
- Details of business activities.
- Evidence of commercial trading intentions.
Maintaining complete and accurate records can help support a valid claim and reduce the risk of disputes with HMRC.
How Do You Claim Sideways Loss Relief?
Sideways loss relief is generally claimed through the Self Assessment system.
The process normally involves:
Step 1 – Calculate Your Trading Loss
Prepare accurate business accounts and establish the allowable trading loss for the relevant tax year.
Step 2 – Review Your Other Income
Identify employment income, pension income, rental income, and other taxable income that may be relevant.
Step 3 – Check Your Eligibility
Confirm that the business meets the commercial trading requirements and that no restrictions prevent the claim.
Step 4 – Compare Available Reliefs
Assess whether claiming against current income, previous income, or future trading profits would be most appropriate.
Step 5 – Submit Your Claim to HMRC
Complete the relevant Self Assessment sections and provide any additional information required to support the claim.
Claims are subject to statutory time limits, so it is important to review the position promptly.
How Business Management Consultation (BMC) Can Help
At Business Management Consultation (BMC), we provide professional accounting, tax planning, and Self Assessment services to sole traders, self-employed individuals, and business owners.
We can help you:
- Prepare accurate self-employed business accounts.
- Calculate allowable trading losses.
- Assess eligibility for sideways loss relief.
- Review employment and other taxable income.
- Determine whether losses can be carried back.
- Assess whether carrying losses forward may be preferable.
- Review early trade loss relief.
- Calculate terminal loss relief where applicable.
- Consider restrictions and relevant tax relief limits.
- Prepare and submit Self Assessment tax returns.
- Calculate potential Income Tax repayments.
- Assist with HMRC correspondence and enquiries.
- Identify legitimate tax-saving opportunities.
Our aim is to ensure that business losses are treated correctly and that clients receive the tax reliefs to which they are entitled.
Don’t Leave Valuable Tax Relief Unclaimed
Making a trading loss can be financially challenging, but it may also create opportunities to reduce your Income Tax liability.
Depending on your circumstances, sideways loss relief could allow you to offset losses against employment income or other taxable income, potentially generating a valuable tax repayment.
However, choosing the most appropriate loss relief requires careful consideration of your current income, previous tax years, future trading expectations, and applicable HMRC rules.
At Business Management Consultation (BMC), we help self-employed individuals understand their tax position, identify available reliefs, and make informed financial decisions.
Call us today on 01273 777 333 to discuss your trading losses or arrange a consultation with one of our experienced advisers.
