How to claim tax relief on self-employed trading losses

When tax adjusted trading losses arise, the default method is to carry forward these losses and offset them against future trading profits of the same trade. However, it is possible to make a claim to offset any losses against total taxable income in the year the losses arise and/or the previous tax year.

A claim to relieve losses against other income may result in a repayment of tax. This will be of benefit to business owners who have seen a fall in their income as a result of Coronavirus. The losses available to offset in each tax year will be restricted to the greater of:

  • £50,000; or
  • 25% of total taxable income in the relevant tax year.

(There is an exception to this rule for non-active partners whose losses are restricted to £25,000.)

In the same way that losses are offset to reduce income tax liabilities, losses will also be offset against any other trading profits in the tax year, to reduce the liability to Class 4 National Insurance Contributions (NICs).

Any unused losses will follow the default method. These losses will be carried forward for both income tax and Class 4 NIC purposes and offset against future trading profits of the same trade.

Special rules

For losses arising in the first four tax years of trade

In addition to rules we’ve highlighted, there are special rules that are available where losses arise in the first four tax years of trading. Where the accounting period does not end on either 31 March or 5 April, there are special opening year rules that need to be considered in determining the level of trading losses, which are assessable in each tax year.

Unlike the rules mentioned above, it is possible to offset losses arising in each of these first four tax years against total taxable income in the previous three years. Any losses will be offset against the earliest year. The same restrictions apply as mentioned above.

For losses arising in 2020/21 and 2021/22

For businesses that previously made a profit, but then made a loss in either the 2020/21 or 2021/22 tax years, the loss can be carried back and set against profits from the same trade in the previous three tax years – applying to the latest years first.

There is no cap on the amount of loss that can be carried back for one year. However, this is subject to a cap:

  • for a loss for 2020-21, £2,000,000 for 2018-19 and 2017-18; and
  • for a loss for 2021-22, £2,000,000 for 2019-20 and 2018-19.

If your business has made any losses and you would like to discuss how to claim tax relief on these, please get in touch with our team at: