Taxation (UK) · Income from self-employment

Trading Losses Relief for Sole Traders in TX-UK

Updated 11 October 2026 · Fact-checked

Carry a trading loss forward against the same trade's future profits, or set it sideways against total income of the loss year and/or previous year. In the first four years, set it against total income of the three preceding years, earliest first. On cessation, terminal loss relief uses trading profits of the final year and previous three. Income claims are capped.

Understand Trading Losses for Sole Traders

A trading loss arises when the adjusted trading profit, after capital allowances, is negative for a tax year. A loss gives no tax charge for that year. The question is how to get the most tax value from it.

There are four reliefs. Carry forward sets the loss against the first available profits of the same trade. Sideways relief (set-off against general income) uses the loss against total income of the tax year of the loss and/or the previous tax year. Opening year relief lets a loss in any of the first four tax years of trading be set against total income of the three tax years before the loss year, earliest year first. Terminal loss relief applies when the trade ceases. It uses the loss of the last twelve months against trading profits of the final tax year and the three years before it.

Sideways relief and opening year relief are subject to the cap on income tax reliefs. Unless otherwise restricted, reliefs are capped at the higher of £50,000 or 25% of income. Carry forward relief and terminal loss relief are set against trading profits, so the cap does not limit them. A loss set against chargeable gains is also not subject to the cap. Any loss not used in a sideways or opening year claim stays available to carry forward against future profits of the same trade.

Timing matters. Sideways relief gives tax back quickly and at your marginal rates, but it can waste the personal allowance. The claim is for the full amount available (subject to the cap), so you cannot choose a smaller claim to protect the allowance. Carry forward is slow, and it only helps if the trade makes profits later. It is not a claim: it applies automatically against the first available profits of the same trade. Part of the skill is choosing the relief that saves the most tax. The rest is computing it in the right order.

Key rules to remember

Cap on income tax reliefs: Cap = higher of £50,000 or 25% × adjusted total income; Applies to sideways relief and opening year relief, not to carry forward or terminal loss relief. Loss not relieved because of the cap remains available to carry forward against future profits of the same trade.
Carry forward relief: Loss c/f set against the first available profits of the SAME trade, as early as possible; Must be used in full against each year's trading profit before moving on, even if this wastes the personal allowance. It is not a claim. It applies automatically against the first available profits of the same trade, so there is no claim time limit to state.
Sideways relief: Loss of year X set against total income of year X and/or year X−1 (either order); Claim within 12 months of the 31 January filing deadline for the loss year. For each year claimed, the claim is for the full amount available, subject to the cap. You cannot restrict it to protect the personal allowance.
Opening year loss relief: Loss in tax years 1 to 4 of trading set against total income of the 3 preceding tax years, earliest first; Same time limit as sideways relief. The cap applies. Loss not used in the claim remains available to carry forward against future profits of the same trade. You can alternatively claim sideways relief for the loss year and the previous year.
Terminal loss relief: Terminal loss = loss of the last 12 months of trading = loss of the final tax year + the part of the previous tax year's loss falling in those 12 months. Set against trading profits of the final tax year, then the previous 3 tax years, latest first; Not capped. Claim within four years of the end of the tax year of cessation. This is the only trading loss relief with a four-year time limit. Any unrelieved overlap relief is deducted in the final tax year's computation, so it increases the loss.
Relief against capital gains: After an income claim for the year, unrelieved loss may be set against chargeable gains of the same year, limited to the gains left after current year capital losses and before the annual exempt amount; Available only after a claim against income has been made. The loss left unrelieved after that income claim is then set against the gains of the same year. A loss set against gains is not subject to the cap on income tax reliefs.

How to solve Trading Losses for Sole Traders questions

Use this order for any trading loss question. It keeps your computation tidy and stops you missing time limits and the cap.

1Work out the loss for the tax year. Use the basis period rules, so for the opening years, apportion periods correctly. Check that capital allowances are included.
2Identify the situation: continuing trade, one of the first four tax years, or the final year of trading. This decides which reliefs are available.
3List the other income in each possible year: non-savings, savings and dividends. You need this for the cap and to see where the personal allowance would be wasted.
4Calculate the cap: the higher of £50,000 or 25% of income. Limit any sideways or opening year claim to this figure.
5Apply the relief in the order the question asks for, or choose the best. Set the loss against non-savings income first, then savings, then dividends. If the question includes chargeable gains, a claim against income must be made first. The loss left unrelieved after that income claim can then be set against the gains of the same year, after current year capital losses and before the annual exempt amount. The cap does not apply to the amount set against gains. Note any amount still unrelieved.
6Carry any unrelieved loss forward against the first future profits of the same trade, and compare the tax saved by each option, including the personal allowance and rate bands.
7State the claim deadlines and any amount carried forward or wasted.

Quickest way: Loss relief decision check

When to use it: Use this in objective test questions and in the first minutes of a written question, when you must pick or apply a relief fast.

Ask: is the trade continuing, newly started (first four tax years), or ceasing? Ceasing means terminal loss relief is in play.
Ask: is the question about sideways relief or opening years relief? If yes, compute the cap at once: the higher of £50,000 or 25% of income.
Ask: does the relief go against total income or against trading profits only? Carry forward and terminal loss use trading profits only.
Remember that sideways relief is all or nothing, so check whether it wastes the personal allowance.
Check that the loss figure used is the loss of the tax year (or terminal loss), not the loss for an accounting period.

Common mistakes in Trading Losses for Sole Traders

Applying the £50,000 / 25% cap to carry forward or terminal loss relief.
Students remember that there is a cap on loss relief and apply it to every relief.
Fix: Apply the cap only to relief against general income: sideways relief and opening year relief. Carry forward and terminal loss relief are against trading profits. A loss set against gains is not capped either.
Carrying forward a loss against other income or against a different trade.
Confusion with sideways relief, which uses total income.
Fix: Carry forward relief is only against profits of the same trade. Say 'first available profits of the same trade'.
Restricting a sideways claim so that income equals the personal allowance.
The tax saving looks bigger if the personal allowance is not wasted, and some students think partial claims are allowed.
Fix: A sideways claim is for the full amount available for the year, subject to the cap. You cannot reduce it to protect the allowance. If wasting the allowance matters, consider carry forward instead and say so.
Taking opening year relief against the wrong years or in the wrong order.
Students mix it up with terminal loss relief, which works latest year first.
Fix: Opening year relief goes against the three preceding tax years, earliest first. Terminal loss goes against the final year then three years back, latest first.
Missing the claim time limits, or inventing a time limit for carry forward.
Students focus on the numbers and forget that some reliefs are claims. Others assume every relief has a deadline.
Fix: State: sideways and opening year claims within 12 months of the 31 January filing deadline for the loss year; terminal loss within four years of the end of the tax year of cessation. Carry forward is not a claim. It applies automatically against the first available profits of the same trade.
Forgetting that the loss uses the tax year basis, so the loss relief year differs from the accounting period.
Students use the accounting period loss directly.
Fix: Allocate profits and losses to tax years using the basis period rules before claiming any relief.

Worked examples

Example 1

Sam, a sole trader, has a trading loss of £60,000 for 2025–26. Her only other income in 2025–26 is property income of £70,000. She makes a claim for sideways relief against total income of 2025–26. Calculate the relief available and the loss left to carry forward.

Show the solution

The claim is for the full amount of loss available, subject to the cap. Sam cannot reduce the claim to protect her personal allowance.
The cap is the higher of £50,000 and 25% of income.
25% × £70,000 = £17,500, which is lower than £50,000, so the cap is £50,000.
Relief against total income is limited to £50,000.
Total income after relief = £70,000 − £50,000 = £20,000.
Total income of £20,000 is above the personal allowance of £12,570, so the allowance is still fully used and none is wasted.
Unrelieved loss = £60,000 − £50,000 = £10,000, carried forward against the first future profits of the same trade.

Answer: Sideways relief is £50,000 because of the cap. Total income falls to £20,000, which still covers the personal allowance in full, and £10,000 of loss is carried forward.

Example 2

Tom ceased trading on 31 March 2026. He made a loss of £24,000 in 2025–26 (the final twelve months of trading). His trading profits were: 2024–25 £10,000; 2023–24 £12,000; 2022–23 £8,000; 2021–22 £6,000. Assume no overlap relief. Show how terminal loss relief is given.

Show the solution

The last twelve months of trading run from 1 April 2025 to 31 March 2026. These coincide with the tax year 2025–26, so no part of the previous tax year falls in the final twelve months.
The terminal loss is therefore the loss of the final tax year only: £24,000 + nil from 2024–25 = £24,000.
Relief is first against trading profits of the year of cessation, 2025–26. These are nil.
Then it goes against the previous three tax years, latest year first.
2024–25: £10,000 relieved. Remaining loss = £14,000.
2023–24: £12,000 relieved. Remaining loss = £2,000.
2022–23: £2,000 relieved. Profit left in that year = £8,000 − £2,000 = £6,000. Loss is used up.
2021–22 is outside the three-year period in any case. The cap does not apply.

Answer: The £24,000 terminal loss is relieved £10,000 in 2024–25, £12,000 in 2023–24 and £2,000 in 2022–23.

Exam tips

In OT questions, read for the trigger words: 'first four years', 'ceased trading', 'total income', 'same trade'. They point straight to the relief.
Always compute the cap when sideways or opening year relief is claimed: higher of £50,000 or 25% of income. Do it even if you think the loss is small.
In written answers, show the loss, the relief by tax year, the remaining income and any amount carried forward, so you pick up method marks even if a figure is wrong.
When asked to advise, compare reliefs by tax saved and mention the personal allowance. Give claim deadlines.
Check the order of years: earliest first for opening year relief, latest first for terminal loss relief.

Practice questions from Income from self-employment

Trading Losses for Sole Traders in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalTrading Losses and Relief Options

Trading Losses for Sole Traders: frequently asked questions

What is the difference between sideways relief and carry forward relief?

Sideways relief sets the loss against total income of the loss year and/or the previous year. It is quicker, but it is capped and all or nothing. Carry forward sets the loss against future profits of the same trade only and is not capped.

How does terminal loss relief work in TX-UK?

When a trade ceases, the loss of the final twelve months is set against trading profits of the tax year of cessation and then the previous three tax years, latest year first. It is not subject to the cap on income tax reliefs. It is only against trading profits.

What is the cap on income tax reliefs?

Unless otherwise restricted, certain reliefs are capped at the higher of £50,000 or 25% of income. In this topic it limits sideways and opening year loss relief against general income. It does not limit carry forward or terminal loss relief.

How do I claim early years loss relief?

A loss in any of the first four tax years of trading can be set against total income of the three preceding tax years, earliest first. You make the claim within 12 months of the 31 January filing deadline for the year of loss. You can instead claim ordinary sideways relief for the loss year and the previous year.