Your Business Made a Loss, Will You Still Owe Tax, Or Can You Use That Loss?
- Adil Akhtar
- 2 days ago
- 16 min read
The Audio Summary of the Key Points of the Article:
Understanding Business Losses and Their Immediate Tax Implications
So, your business has made a loss—ouch, that stings! But here’s the good news: in the UK, a business loss doesn’t automatically mean you’ll owe tax, and you might even turn that loss into a tax advantage. Let’s break down what a business loss means for your taxes, whether you’re a sole trader, part of a partnership, or running a limited company, and how the 2024/25 tax year rules apply. We’ll use clear examples and verified data to make this as practical as possible.
What Exactly Is a Trading Loss?
Let’s start at the beginning. A trading loss happens when your allowable business expenses exceed your income in an accounting period. For example, if your sole trader business earned £10,000 in the 2024/25 tax year but spent £15,000 on allowable expenses (like equipment, rent, or supplies), you’ve got a £5,000 trading loss. This applies whether you’re self-employed, in a partnership, or running a limited company. The key is that only allowable expenses count—things like depreciation or entertaining clients don’t qualify for tax relief, as per HMRC rules.
For sole traders and partnerships, you calculate losses using either the cash basis (money in and out) or accruals basis (income and expenses when earned or incurred). Limited companies use the accruals basis for Corporation Tax. In 2024/25, HMRC’s rules remain clear: losses must be reported on your tax return, and you can use them to reduce your tax bill in various ways, which we’ll explore shortly.
Will You Still Owe Tax Despite a Loss?
Now, here’s the big question: do you still owe tax if your business makes a loss? Generally, no—you won’t pay tax on a loss itself. If your business has no taxable profits, there’s no Income Tax (for sole traders/partnerships) or Corporation Tax (for limited companies) to pay for that period. For example, in 2024/25, the personal allowance is £12,570, meaning you pay no Income Tax on income up to this amount. If your sole trader business makes a £5,000 loss and you have no other income, you’re well below this threshold, so no tax is due.
However, things get tricky if you have other income. Say you’re a sole trader with a part-time job earning £20,000 in 2024/25, plus a £5,000 business loss. Your taxable income could still be above the personal allowance, meaning you might owe Income Tax unless you offset the loss (more on that later). For limited companies, losses can’t be offset against your personal income, as the company is a separate legal entity—HMRC treats it like a different “person.”
Can You Get a Tax Refund?
Here’s where it gets interesting. If you’ve paid tax in the past and now have a loss, you might be able to claim a refund by carrying the loss back to offset previous profits. For sole traders and partnerships, you can carry losses back one year (or up to three years for new businesses or when closing a trade). Limited companies can also carry losses back one year, or three years if the business ceases trading (known as terminal loss relief). If you’ve already paid tax on those earlier profits, HMRC will issue a refund, though any outstanding Corporation Tax debts will be deducted first.
For example, imagine your limited company made a £10,000 profit in 2023/24, paying £1,900 in Corporation Tax (at 19% for small profits). In 2024/25, you make a £12,000 loss. By carrying back £10,000 of that loss, you could reduce your 2023/24 taxable profit to zero, potentially getting that £1,900 back. You’d need to file this claim via your Company Tax Return (CT600) within two years of the loss-making period’s end.
Table 1: Key Tax Rates and Allowances for 2024/25
Category | Details |
Personal Allowance | £12,570 (no Income Tax on income up to this amount) |
Basic Rate Income Tax | 20% on income between £12,571 and £50,270 |
Corporation Tax (Small) | 19% for profits up to £50,000 |
Corporation Tax (Main) | 25% for profits over £250,000 (marginal relief for profits in between) |
Loss Carry Back Limit | 1 year (3 years for terminal losses or new businesses in first 4 years) |
Loss Carry Forward | Indefinite, but restricted to £5m + 50% of profits for post-1 April 2017 losses |
Source: HMRC Tax Rates and Allowances and GOV.UK Corporation Tax
How Can You Use a Loss as a Sole Trader?
Let’s say you’re a sole trader like Elowen, a freelance graphic designer in Cornwall. In 2024/25, her business income is £8,000, but expenses (including a new laptop qualifying for Annual Investment Allowance) total £12,000, leaving a £4,000 loss. Elowen also earns £15,000 from a part-time teaching job. She has three main options for using this loss, per HMRC’s 2024/25 rules:
Offset against other income in the same year (sideways relief): Elowen can deduct her £4,000 loss from her £15,000 salary, reducing her taxable income to £11,000. Since this is below the £12,570 personal allowance, she pays no Income Tax and might get a refund for any tax already paid via PAYE (e.g., £446, as in a similar case from litrg.org.uk).
Carry back to the previous year: If Elowen had taxable income in 2023/24, she could offset the loss against that, potentially getting a refund. Claims must be made within one year from 31 January following the loss-making year (e.g., by 31 January 2026 for 2024/25 losses).
Carry forward to future years: If Elowen expects profits in 2025/26, she can carry the loss forward indefinitely to offset future profits from the same trade. This is the default if no other action is taken.
Be careful, though! Sideways relief is capped at £50,000 or 25% of your adjusted total income, whichever is greater. Also, if you work less than 10 hours a week on your business, the cap drops to £25,000. Elowen, spending 20 hours a week freelancing, isn’t affected by this, but it’s worth checking your hours.
Why Might Carrying Forward Make Sense?
Now, consider this: carrying losses forward can be a smart move if you expect higher profits later, especially for limited companies facing the 25% Corporation Tax rate (for profits over £250,000 in 2024/25). For example, Jago, who runs a small tech startup in Bristol, makes a £15,000 loss in 2024/25 but anticipates £50,000 profit in 2025/26. By carrying the loss forward, he reduces his 2025/26 taxable profit to £35,000, saving £3,750 in Corporation Tax (25% of £15,000). Since losses after 1 April 2017 can be offset against total profits (not just the same trade), this gives Jago flexibility.
However, there’s a catch. For losses made on or after 1 April 2017, relief is limited to £5 million plus 50% of profits above that in the accounting period. Most small businesses won’t hit this cap, but it’s something larger firms need to watch.
Advanced Strategies and Practical Steps for Using Business Losses
Now that you’ve got the basics of how business losses affect your taxes, let’s dig into the nitty-gritty. How can you make the most of your losses in the UK, whether you’re a sole trader, in a partnership, or running a limited company? This part explores advanced loss relief strategies, rare scenarios like terminal losses, and a step-by-step guide to claiming relief accurately in the 2024/25 tax year. We’ll use real-world examples and HMRC-verified rules to keep things practical and clear.
How Can You Offset Losses Against Other Income?
Let’s say you’re a sole trader or partner with a loss and other income, like a salary or rental profits. Sideways relief can be a lifesaver. For instance, Tamsin, a self-employed baker in Leeds, makes a £7,000 loss in 2024/25 due to high ingredient costs. She also earns £25,000 from a part-time office job. By claiming sideways relief, she can deduct the £7,000 loss from her £25,000 salary, reducing her taxable income to £18,000. After the £12,570 personal allowance, her taxable income drops to £5,430, taxed at the 20% basic rate (£1,086). Without the loss, she’d pay £2,486 in tax, so she saves £1,400.
Be careful, though! Sideways relief has limits. In 2024/25, you can’t claim more than £50,000 or 25% of your adjusted total income (whichever is higher) unless your business is deemed non-commercial (e.g., a hobby). If Tamsin only works five hours a week on her bakery, HMRC might cap her relief at £25,000, though her £7,000 loss is well below this. You’ll need to report this on your Self Assessment tax return (SA100 for income, SA102 for partnerships) under the “Losses” section.
What About Carrying Losses Back for Refunds?
Now, here’s a powerful option: carrying losses back. This lets you offset a loss against profits from the previous year (or up to three years for new businesses or terminal losses). Take Idris, who runs a small plumbing business in Cardiff. In 2023/24, he made a £12,000 profit, paying £1,284 in Income Tax (after the personal allowance). In 2024/25, his business takes a £15,000 loss due to a major client defaulting. By carrying back £12,000 of the loss to 2023/24, he reduces his taxable profit to zero, potentially getting a £1,284 refund from HMRC. The remaining £3,000 loss can be carried forward.
For limited companies, it’s similar. A company can carry back losses to offset profits from the previous 12 months. If Lowen’s tech firm in Manchester makes a £20,000 loss in 2024/25 and had a £15,000 profit in 2023/24 (paying £2,850 in Corporation Tax at 19%), carrying back £15,000 of the loss could wipe out that tax bill, triggering a refund. You must claim this within two years of the loss-making period’s end via the CT600 form, as per HMRC’s rules.
Table 2: Loss Relief Options for 2024/25
Relief Type | Who Can Use It? | Key Rules |
Sideways Relief | Sole traders, partnerships | Offset against other income in the same year; capped at £50,000 or 25% of income |
Carry Back | Sole traders, partnerships, companies | Offset against profits from previous 1 year (3 years for new/closing businesses) |
Carry Forward | Sole traders, partnerships, companies | Offset against future profits; indefinite for same trade; £5m cap for companies |
Terminal Loss Relief | All, when business ceases | Offset against profits from previous 3 years; claim within 4 years of cessation |
Source: HMRC Loss Relief Guidance and GOV.UK Corporation Tax Losses
What Happens When Your Business Closes?
So, the question is: what if your business shuts down? Terminal loss relief can be a game-changer. This applies when you permanently stop trading, letting you carry back losses from the final 12 months against profits from the previous three years. For example, Morwenna, a florist in Devon, closes her shop in March 2025, making a £10,000 loss in her final year. She had profits of £8,000 in 2022/23, £12,000 in 2023/24, and £5,000 in 2024/25 before the loss. She can carry back the £10,000 loss to offset her 2023/24 profits (£12,000), reducing them to £2,000 and potentially getting a refund on the tax paid (£1,920 at 20%). Claims must be made within four years of the business’s end, per HMRC’s 2024/25 guidance.
For limited companies, terminal loss relief works similarly but is claimed via the CT600. If the company is dissolved, ensure all tax returns are filed before applying for relief, as HMRC won’t process refunds post-dissolution.
Step-by-Step Guide: How to Claim Loss Relief
None of us is a tax expert, but claiming loss relief doesn’t have to be daunting. Here’s a practical guide for sole traders and limited companies in 2024/25:
Calculate Your Loss: Review your accounts (cash or accruals basis) to confirm your trading loss. Use allowable expenses only, as per HMRC’s list (e.g., office costs, travel, but not client entertainment). Software like QuickBooks or Xero can help.
Decide Your Relief Option: Choose between sideways relief, carry back, or carry forward based on your income and profit history. Check caps (e.g., £50,000 for sideways relief) and time limits (e.g., one year for carry back).
Complete Your Tax Return: For sole traders, use the SA100 (Self Assessment) and include losses in the “Self-employment” pages. For partnerships, use SA104. For companies, file the CT600, detailing losses in the “Losses” section.
Submit to HMRC: File by 31 January 2026 for 2024/25 Self Assessment (online) or 31 October 2025 (paper). Companies must file within 12 months of the accounting period’s end. Include a computation showing how the loss is applied.
Track Refunds or Carry Forward: If carrying back, expect a refund within weeks if no debts are owed. For carry forward, HMRC records the loss for future offsets—keep records indefinitely.
Seek Advice if Unsure: Complex cases (e.g., terminal losses) may need an accountant. Check HMRC’s helpline or gov.uk for free guidance.
What About New Businesses?
Now, consider this: if your business is in its first four years, you get extra flexibility. HMRC allows losses to be carried back up to three years before the loss-making year, provided the business was trading then. For example, Kensa, who started a catering business in 2022, makes a £9,000 loss in 2024/25. She can carry this back to 2021/22, 2022/23, or 2023/24 if she had other taxable income (e.g., from a previous job). This is especially useful for startups, as early losses are common. You must claim within two years of the loss-making year’s end, per HMRC’s rules.
Why Might Losses Be Restricted?
Be warned! HMRC has strict rules to prevent abuse. If your business is deemed non-commercial (e.g., you’re not aiming for profit), loss relief may be denied. For instance, if Tamsin’s bakery is a side hustle with minimal hours and no profit motive, HMRC could reject her sideways relief claim. Also, for limited companies, losses can’t be used if the company has unpaid taxes or is in liquidation. Always ensure your accounts are HMRC-compliant and filed on time to avoid hiccups.
Moving Forward
We’ve covered how to strategically use losses, from sideways relief to terminal loss claims, with a clear guide to get started. The next part will summarize the key points and wrap up with practical tips to ensure you’re maximizing your tax relief while staying compliant with HMRC.
Summary and Key Takeaways for UK Taxpayers and Business Owners
Now, let’s wrap things up with a clear, concise summary of the most critical points about handling business losses in the UK. Whether you’re a sole trader, part of a partnership, or running a limited company, these takeaways will help you navigate the tax implications of a loss in the 2024/25 tax year. We’ll boil down the essentials into a numbered list, ensuring you have actionable insights to make the most of your situation while staying compliant with HMRC.
Summary of the Most Important Points
A trading loss occurs when your allowable business expenses exceed your income in an accounting period, and it doesn’t automatically mean you owe tax. For example, if your sole trader business earns £10,000 but spends £15,000 on allowable expenses, you have a £5,000 loss, which can be used to reduce your tax liability.
You won’t pay Income Tax or Corporation Tax on a loss itself, but other income (like a salary) may still be taxable unless offset by the loss. A sole trader with a £5,000 loss and £20,000 salary can reduce their taxable income to £15,000, potentially lowering their tax bill.
Sideways relief allows sole traders and partnerships to offset losses against other income in the same tax year, up to a cap of £50,000 or 25% of adjusted income. For instance, offsetting a £7,000 loss against a £25,000 salary could save £1,400 in Income Tax, as seen in a Leeds baker’s case.
Carrying losses back lets you offset them against profits from the previous year (or three years for new businesses or terminal losses), potentially triggering a tax refund. A limited company with a £15,000 loss in 2024/25 could carry it back to a £15,000 profit in 2023/24, reclaiming £2,850 in Corporation Tax.
Losses can be carried forward indefinitely to offset future profits from the same trade, which is ideal if you expect higher earnings later. A tech startup anticipating £50,000 profit in 2025/26 could use a £15,000 loss from 2024/25 to save £3,750 in Corporation Tax.
Terminal loss relief applies when a business closes, allowing losses from the final year to be carried back against profits from the previous three years. A florist closing in 2025 with a £10,000 loss could offset it against 2023/24 profits, potentially recovering £1,920 in tax.
New businesses in their first four years can carry losses back up to three years against other income, helping startups manage early losses. A caterer with a £9,000 loss in 2024/25 could offset it against income from 2021/22, if applicable.
Loss relief claims must be filed via Self Assessment (SA100/SA104) for individuals or CT600 for companies, with strict deadlines (e.g., 31 January 2026 for 2024/25 Self Assessment). Accurate records and timely filing are crucial to avoid HMRC rejecting claims.
HMRC may restrict loss relief if your business is deemed non-commercial or if a company has unpaid taxes or is in liquidation. For example, a side hustle with minimal hours might face a £25,000 relief cap if not run commercially.
Using accounting software and consulting an accountant for complex cases (e.g., terminal losses) ensures compliance and maximises relief. Tools like QuickBooks can streamline loss calculations, while HMRC’s helpline offers free guidance for simpler queries.
Why These Points Matter
So, why should you care about these takeaways? They’re your roadmap to turning a business loss into a tax advantage, whether you’re reducing your current tax bill, reclaiming past taxes, or saving for future profits. For instance, a sole trader like Elowen, who offset her £4,000 loss against her salary, avoided paying Income Tax entirely in 2024/25. Similarly, a company like Jago’s tech startup saved thousands by carrying losses forward strategically. These options are grounded in HMRC’s 2024/25 rules, verified via GOV.UK Self Assessment and HMRC Corporation Tax Losses.
Table 3: Deadlines and Filing Requirements for Loss Relief (2024/25)
Action | Deadline | Form | Notes |
Self Assessment (Online) | 31 January 2026 | SA100/SA104 | Include losses in “Self-employment” or “Partnership” pages |
Self Assessment (Paper) | 31 October 2025 | SA100/SA104 | Earlier deadline; less common due to online filing |
Corporation Tax Return | 12 months after accounting period end | CT600 | Detail losses in “Losses” section; include computation |
Carry Back Claim | 2 years from loss-making period end | SA100/SA104 or CT600 | Must specify how loss is applied; refunds subject to HMRC debt checks |
Terminal Loss Claim | 4 years from business cessation | SA100/SA104 or CT600 | Only for final 12 months’ losses; apply against prior 3 years’ profits |
How to Stay Ahead of HMRC
Now, here’s the deal: HMRC doesn’t mess around with compliance. Keep detailed records of your losses, including receipts for allowable expenses, as HMRC may audit claims. Use accounting software to track income and expenses accurately—Xero or FreeAgent are great for UK businesses. If your situation is complex (e.g., a partnership with multiple loss allocations or a company nearing the £5m loss relief cap), consider an accountant. They can navigate quirks like ensuring your business meets HMRC’s “commerciality” test to avoid relief denials.
For example, in a 2024 case study from the Low Incomes Tax Reform Group, a sole trader was denied sideways relief because their craft business was deemed a hobby (under 10 hours/week and no profit intent). To avoid this, document your business plan and hours worked, especially if losses persist.
What’s Next for Your Business?
Now, consider this: a loss isn’t the end of the world—it’s a chance to rethink your strategy. Use the tax savings from loss relief to reinvest in your business, whether it’s new equipment, marketing, or training. If you’re closing shop, terminal loss relief can cushion the blow with a refund. Whatever your situation, act fast to meet HMRC deadlines, and don’t hesitate to use free resources like the HMRC helpline (0300 200 3310) or GOV.UK’s tax guides for clarity.
This summary ties together the key ways to handle losses, from immediate relief to long-term planning, ensuring you’re equipped to make informed decisions. By following these steps, you can minimise your tax burden and keep your business on track, even after a tough year.
FAQs
Q1: What qualifies as an allowable expense for calculating a business loss in the UK?
A1: Allowable expenses include costs like office supplies, travel, staff wages, and certain equipment, but exclude non-business expenses like client entertainment or personal use items.
Q2: How does HMRC determine if a business is commercial for loss relief purposes?A2: HMRC assesses if the business is run with a genuine profit motive, considering factors like time spent, business plans, and consistent profit-making efforts.
Q3: Can a business loss be used to reduce National Insurance contributions?
A3: Business losses can reduce taxable income, which may lower Class 4 National Insurance contributions for self-employed individuals, but Class 2 contributions are flat-rate and unaffected.
Q4: What happens if a loss relief claim is filed incorrectly with HMRC?
A4: An incorrect claim may be rejected, leading to penalties or delayed refunds; HMRC may also request additional documentation to verify the loss.
Q5: Can a partnership allocate losses differently among partners?
A5: Partners can allocate losses based on their partnership agreement, but the split must reflect profit-sharing ratios and be reported on the SA104 form.
Q6: Is there a time limit for amending a loss relief claim after filing?
A6: Amendments can be made within 12 months of the filing deadline for the relevant tax return, such as 31 January following the tax year.
Q7: Can losses from a previous business be used if someone starts a new trade?A7: Losses from a previous trade cannot be carried forward to a new, unrelated trade; they are restricted to the same business activity.
Q8: How does loss relief work for businesses using the cash basis?
A8: Losses under the cash basis are calculated based on actual cash paid and received, and can be used for sideways relief, carry back, or carry forward, similar to the accruals basis.
Q9: Can a limited company offset losses against dividends paid to shareholders?A9: Losses cannot be offset against dividends, as dividends are not taxable profits; they can only reduce Corporation Tax on company profits.
Q10: What records must be kept to support a loss relief claim?
A10: Businesses must retain receipts, invoices, bank statements, and accounting records for at least six years to substantiate allowable expenses and losses.
Q11: Can a business loss reduce Capital Gains Tax liability?
A11: Trading losses cannot directly offset Capital Gains Tax, but if losses reduce taxable income below the personal allowance, any capital gains within the allowance may be tax-free.
Q12: How does HMRC handle loss relief for businesses with irregular accounting periods?
A12: Losses are apportioned to the relevant tax year based on the accounting period’s dates, ensuring relief aligns with the correct tax year’s profits.
Q13: Can a sole trader claim loss relief if they switch to a limited company?
A13: Losses from a sole trader business cannot be transferred to a limited company, as they are separate legal entities; the losses remain with the sole trader’s trade.
Q14: What are the tax implications of not claiming a loss in the year it occurs?
A14: Unclaimed losses can be carried forward indefinitely for the same trade, but failing to report them on time may limit carry-back options.
Q15: Can losses be used if a business operates part-time?
A15: Part-time businesses can claim loss relief, but if less than 10 hours per week are worked, sideways relief may be capped at £25,000.
Q16: How does loss relief affect VAT obligations?
A16: Loss relief does not directly impact VAT, as VAT is based on sales, not profits; however, reduced income may lower VAT liability if below the threshold.
Q17: Can a business claim loss relief if it’s temporarily paused but not closed?
A17: Losses can be claimed during a pause if the business intends to resume, but relief is limited to allowable expenses incurred during the active trade.
Q18: What happens to unused losses if a limited company is sold?
A18: Unused losses may be transferred to the buyer if the company and its trade continue, but HMRC approval is needed and losses may be restricted.
Q19: Can losses be offset against rental income for sole traders?
A19: Sole traders can use sideways relief to offset trading losses against rental income in the same tax year, subject to the usual caps.
Q20: How does HMRC notify businesses about the outcome of a loss relief claim?A20: HMRC typically confirms via letter or through the online Self Assessment or Corporation Tax account, detailing approved relief or any issues requiring further action.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 10 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
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