Are you a sole trader, landlord, or small business owner who’s made less profit than expected or even a loss? While no one enjoys financial setbacks, there’s a silver lining: income tax losses can work in your favour. In the UK, HMRC allows you to use certain types of losses to reduce your tax bill, sometimes even triggering a tax refund.
Whether you’ve just launched your business or had a challenging year, understanding income tax loss relief could help you improve your cash flow, reclaim overpaid tax, and stabilise your finances.
What Does Income Tax Loss Mean?
An income tax loss occurs when your taxable income is lower than your allowable expenses during a tax year. This typically happens when you’re self-employed, running a small business, letting property, or disposing of capital assets at a loss.
Rather than this loss simply going to waste, HMRC allows you to claim tax relief, helping you offset that loss against other income streams or profits in different tax years. This mechanism can either reduce the amount of tax you owe or even result in a refund of tax already paid.
Whether you’re a sole trader, freelancer, landlord, or in a business partnership, understanding how income tax losses work can help you manage lean periods more effectively.
Types of Income Tax Losses in the UK
There are three primary categories of income tax losses in the UK, each with its own set of rules and relief options:
1. Trading Losses
These arise from self-employment or running a business. If your expenses exceed your income, you may be eligible to offset the trading loss against:
- Other income (e.g. salary or dividends)
- Past or future business profits
- The final years of trade (if you’re closing your business)
2. Property Income Losses
Landlords can incur a loss if rental income is lower than the allowable expenses (e.g. mortgage interest, repairs, insurance).
Important: Property income losses can only be carried forward and offset against future rental profits.
3. Capital Losses
If you sell an asset (like shares or property) for less than its original cost, the shortfall is a capital loss. These can typically be set against other capital gains, reducing your Capital Gains Tax liability.
How to Use Income Tax Losses to Your Advantage
Understanding how to utilise your losses effectively can save you thousands in tax. Here are the three main ways to do it:
1. Carry Forward Losses
This is the most common method used by businesses expecting future profitability.
📌 How it works:
You deduct the loss from future profits from the same trade or income source.
Example:
Sarah runs a freelance design business and incurs a £10,000 loss in 2023/24. The following year, in 2024/25, she earns a £15,000 profit. By carrying forward her loss, she pays tax only on £5,000.
Best for: Growing businesses or startups expecting profits in upcoming years.
2. Carry Back Losses
Useful if you’ve had profitable years recently and want to recover tax already paid.
📌 How it works:
Apply current year losses to profits made in the previous year and reclaim the tax paid.
Example:
John’s café makes a £20,000 loss in 2023/24. In 2022/23, he had a £20,000 profit and paid £4,000 in tax.
➡ He carries back the loss and gets a £4,000 tax refund.
Best for: Businesses with fluctuating income year on year.
3. Offset Against Other Income (Trading Losses Only)
Applicable only to self-employed individuals and partnerships—not property or investment income.
📌 How it works:
Offset trading losses against other income (e.g. PAYE salary, dividends, savings interest) in the same or previous tax year.
Example:
Emma earns £30,000 from her job and suffers an £8,000 loss from a side business.
➡ She reduces her taxable income to £22,000, lowering her tax bill significantly.
Best for: Self-employed people with mixed sources of income.
Important Deadlines & HMRC Rules to Remember
Understanding HMRC’s deadlines and restrictions is vital to avoid missed opportunities:
⏳ Time Limits
- Carry forward: No strict deadline, but must be reported in future tax returns.
- Carry back: Generally must be claimed within 4 years of the end of the loss year.
- Offset against other income: Must be claimed by 31 January after the end of the following tax year.
➡ For 2023/24 losses, deadline is 31 Jan 2026.
🚫 Restrictions
- Property losses: Can only be carried forward to offset future rental income.
- Capital losses: Must be used against capital gains, not income.
- Limited companies: Subject to different rules under Corporation Tax, not Income Tax.
When Do You Incur an Income Tax Loss?
While income tax losses are most common among the self-employed and landlords, even employed individuals can encounter circumstances where allowable expenses lead to a tax loss.
For Self-Employed Individuals:
- Start-up costs outweigh income during initial trading years
- Seasonal or volatile sectors (e.g. agriculture, creative industries)
- High capital investment in equipment or marketing
- Unforeseen costs like legal disputes or supply chain issues
For Employed Individuals:
Although rare, employed people can incur a tax loss if:
- Large allowable expenses (e.g. for travel or tools) exceed income
- Redundancy payments are over-taxed then corrected
- Repaid bonuses or wages lead to a net negative adjustment
Real-Life Examples of Tax Loss Relief in Action
To illustrate how tax loss relief works, here are a few relatable scenarios:
Example 1: Set Off Against Other Income
Jack, a self-employed photographer, incurs an £8,000 trading loss in 2023/24.
His other employment income is £25,000.
➡ His taxable income is reduced to £17,000, making him eligible for a £1,600 tax refund.
Example 2: Carry Back Loss
Oliver starts a business in 2023/24 and makes a £2,000 loss.
In 2022/23, he had an income of £18,000.
➡ He offsets the loss against 2022/23 and receives a £400 refund.
Example 3: Fall Below Personal Allowance
Octavia working part-time, earns £14,500 and incurs a £5,000 trading loss.
➡ Her taxable income drops below the personal allowance, triggering a £386 refund from PAYE deductions.
These examples show how strategic use of tax loss relief can dramatically improve cash flow and ease financial pressure.
Changes to Income Tax Loss Rules (Effective from 6 April 2024)
From the 2024/25 tax year, significant updates have been introduced that benefit small businesses and sole traders:
Cash Basis Becomes Default: The cash basis of accounting is now standard for many sole traders, simplifying how income and expenses are reported. This method records transactions when money changes hands, not when invoices are issued.
No Thresholds or Interest Caps: The previous turnover threshold and £500 cap on interest deductions have been removed. Losses can now be offset more freely against other income, offering greater flexibility.
Per-Business Accounting Option: If you operate multiple businesses, you can now choose accounting methods individually—cash basis for one, traditional accounting for another.
These updates aim to streamline tax relief claims, making it easier to adapt your approach based on how your business performs.
Where & How to Claim Tax Loss Relief
You must report and claim any losses in the correct tax return forms to benefit from relief:
Sole Traders & Landlords ➡ File your claim in the Self Assessment Tax Return.
Limited Companies ➡ Use the Corporation Tax Return to claim company losses.
Need Help with Income Tax Losses? Contact Us Today
Not sure where to start or which relief applies to you? Our expert tax advisors are here to help you maximise your relief, ensure accurate claims, and save money on your next tax bill.
Frequently Asked Questions
Q1: Can I claim an income tax loss if I’ve never made a profit?
A: Yes, particularly with carry forward relief. Losses can be saved for future profitable years.
Q2: Can I use rental property losses to reduce my salary tax?
A: No. Property losses can only be offset against future rental profits, not other income.
Q3: Do income tax losses expire?
A: Carry forward losses do not expire, but some reliefs like carry back or set-off against other income have strict deadlines.
Q4: Do different rules apply for limited companies?
A: Yes, they must follow Corporation Tax rules, which differ from individual income tax regulations.
