Loss relief - what’s the best way to go?

Options

Making a loss in business is never good but as a consolation there are several of ways you can use it to reduce your other tax liabilities.

Choosing the best option is often not easy as is depends on how much income you have in the same, previous and future years. Therefore it pays to understand what your options are before you crunch the numbers.

Forwards, backwards or sideways

For a business, other than those run through a company, you can:

• use the loss to reduce income tax liabilities on income of the same year as the loss; or
• reduce income tax liabilities for the year before that in which the loss occurred; or
• if the loss is for any of the first four tax years of your business - reduce income tax of the three previous years (the earliest year first, then if any loss is left, the next year, and so on). For example, if 2023/24 is your first year in business and it showed a loss, you could claim relief against your 2020/21 tax, then 2021/22 and then 2022/23; or
• not claim loss relief in any of the ways described above. Instead it will automatically be deducted from future profits of the same business.

There are two caps on the amount of sideways and carried-back loss relief you can claim in a year. They are: the greater of £50,000 and 25% of your annual taxable income; and £25,000 if on average you spend less than ten hours per week working in your business. In practice, it’s difficult to see how HMRC can apply the second rule except in the most obvious situations. Tip. If you can’t use all the loss relief against your income tax you can elect to use it against capital gains tax (CGT).

Use personal allowances wisely

When working out how to obtain the greatest tax reduction you need to understand how loss relief interacts with your tax-free personal allowances.

Example. You make a loss in 2023/24 of £30,000 and set it against your 2022/23 tax. Your income for that year was £35,000. After deducting your personal tax-free allowance (£12,570) you paid tax on £22,430. Nevertheless, because your income for the year exceeded the loss, the full £30,000 relief must be used meaning that £7,570 of your personal allowance is wasted: £35,000 total income - £30,000 losses = £5,000 taxable income, therefore only £5,000 of your £12,570 personal allowance has been used.

If you expected to make a profit for 2024/25 of £10,000 and £25,000 for 2025/26, and your other income remains around £30,000, you could save more tax by not claiming loss relief. This would mean loss would be carried forward and reduce your taxable profit for 2024/25 by £10,000 to nil and that for 2025/26 by £20,000. Therefore you would receive tax relief for the full £30,000 without wasting any tax-free allowances.

You can’t withdraw a loss claim once made. As you have up to 20 months following the end of the tax year in which you make a claim, take this time to see how future income pans out so you can make a more informed decision about which type of loss claim to make.