Sole-trader loss relief

Finance Act 2025 · 2025/26

1 Current/prior income and carry forward

In this TX lecture: Sole-trader opening-year and terminal loss relief, trading losses against capital gains, and the cap on income tax reliefs are not examined in FTX. Use the FTX notes for the in-scope loss examples.

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Sole traders are assessed on a tax year basis. If there is a trading loss, the trading profit assessment to include in the income tax computation is nil.
The trading profit figure in an income tax computation can never be negative.

The loss may be relieved according to the following rules. A repayment of income tax may result in some circumstances.

2 Carry forward of trading losses

A trading loss may be carried forward and set against the first available trading profits arising from the same trade.
The trading loss must be set off in full against the next available trading profit if this option is chosen; i.e. the taxpayer cannot choose the amount to relieve.
Any loss remaining is carried forward until further trading profits arise.
The loss may be carried forward indefinitely.

Albert has had the following recent trading results as adjusted for tax:

		£
Year to 31 March 2024	Loss	(5,000)
Year to 31 March 2025	Profit	3,000
Year to 31 March 2026	Profit	10,000

Assume that Albert chooses to carry forward the loss.

Calculate Albert's assessable trading income for all relevant tax years.

Albert

	2023/24	2024/25	2025/26
	£	£	£
Trading income	Nil	3,000	10,000
Less: carry forward relief	-	(3,000)	(2,000)
Revised trading income	Nil	Nil	8,000

Working – loss memorandum	£
Trading loss: year to 31 March 2024	5,000
Less: carry forward relief in 2024/25	(3,000)
	2,000
Less: carry forward relief in 2025/26	(2,000)
Loss carried forward	Nil

Note

The loss is set off against the first trading profits to arise, to the maximum extent possible. Thus £3,000 of the loss is set off in 2024/25 and the remainder carried forward to 2025/26.

3 Loss relief against total income

A trading loss may be relieved against total income (after any qualifying loan interest payments) of the tax year of the loss and/or the preceding tax year.

a loss for the year ended 31 March 2026, assessable in 2025/26 on a tax year basis, may be relieved against total income in the current tax year (2025/26) and/or in the previous year (2024/25).

Charles has the following trading profit/(loss) results:

Year ended	£
Year ended 31 March 2024	32,000
Year ended 31 March 2025	25,000
Year ended 31 March 2026	(84,000)

Charles also has property income in each year of £6,000.

Calculate Charles’ taxable income for each relevant tax year, assuming that the trading loss is used in the most beneficial way and future trading profits are not anticipated. Assume the personal allowance for 2025/26 applies in all tax years.

Charles

Income tax computations

	2023/24	2024/25	2025/26
	£	£	£
Trading profit	32,000	25,000	Nil
Property income	6,000	6,000	6,000
Total income	38,000	31,000	6,000
Less reliefs:
Loss relief against total income		(31,000)
Net income	38,000	Nil	6,000
PA	(12,570)	(12,570)	(12,570)
Taxable income	25,430	Nil	Nil

A CURRENT YEAR claim against total income in 2025/26 would waste the personal allowance and save no income tax, hence no claim is made in the current tax year.
A CARRY BACK claim to 2024/25 will also waste the PA, but will generate a repayment of tax of 20% on what would otherwise have been a taxable income of £18,430 (£31,000 - £12,570).
A CARRY FORWARD CLAIM: The balance of the trading loss £53,000 (£84,000 - £31,000) will then be carried forward against the first available future trading profits from the same trade.

Oliver had employment income of £92,000 and trading profit of £24,000 in 2024/25. His trading loss for 2025/26 is £110,000. Ignoring the cap on income-tax reliefs, which is not examined in FTX, what is the maximum claim against 2024/25 total income?

A. £116,000

B. £110,000

C. £92,000

D. £24,000

B. Total income is £116,000. The loss claim is the lower of this income and the available loss: £110,000. The personal allowance is applied after loss relief; it does not reduce the income available for the claim.

Effie has traded for many years. She has a trading loss of £45,000 and property income of £8,000 in 2025/26. If she claims relief against current-year total income, how much loss remains available to carry forward against future profits of the same trade?

A. £45,000

B. £37,000

C. £8,000

D. £0

B. The current-year claim uses £8,000 before the personal allowance. The remaining loss is £45,000 − £8,000 = £37,000, carried forward against the first future profits of the same trade. The current-year claim wastes the personal allowance, so compare it with a carry-forward-only claim.

Under s 64 claim against total income of the loss year, the preceding year, or both in either order. Deduct qualifying interest first. Each chosen year is a separate claim; use the loss to the maximum available extent.
A claim against total income is made before the personal allowance, so the allowance can be wasted. Claim by 31 January nearly two years after the loss tax year ends.
Under s 83 carry unused loss forward against the first future profits of the same trade. Use it in full against those profits; remaining loss continues forward. Notify the loss within four years of the loss year-end.
Opening-year relief, terminal loss relief, loss-versus-capital-gains relief and the cap on income-tax reliefs are outside FTX. These reliefs are not examined in FTX.

4 Choosing a loss claim

Calculate the tax saved under each permitted option, rather than automatically choosing the largest income. A higher marginal rate can give a larger saving.
Compare the timing: carry back can recover tax already paid; carry forward waits for future trading profit.
Check whether a current/prior total-income claim wastes the personal allowance. Claims cannot be restricted just to preserve it. Each partner makes their own choice.

Vivian has a 2025/26 trading loss £15,000 and other income £20,000. In 2024/25 her income was £70,000. Assume the same supplied rates and allowance for both years. Compare current-year and prior-year relief.

Current year without relief: (20,000−12,570)×20%=£1,486. With full £15,000 relief net income is £5,000 and tax nil: saving £1,486, with unused PA. Prior year falls from £70,000 to £55,000: the entire £15,000 is relieved at 40%, saving £6,000. Carry back gives the larger saving and a repayment sooner than carry forward.

Wei has an unused loss £18,000 and same-trade profit £25,000 next year. Find the trading-income amount after carry-forward relief.

Deduct the first £18,000 from the first available same-trade profit: 25,000−18,000=£7,000. Do not choose a smaller deduction to preserve PA.