Taxation (UK) · The use of exemptions and reliefs in deferring and minimising income tax liabilities

Trading Loss Relief and Choosing the Best Relief for Sole Traders

Updated 11 October 2026 · Fact-checked

A sole trader's trading loss can be carried forward against later profits of the same trade, or set against general income of the loss year and/or the previous year. New traders and ceasing traders get extra claims. To choose, compute the tax saved under each option and pick the largest, allowing for wasted allowances.

Understand Trading Loss Relief and Choosing the Best Relief

A trading loss arises when allowable expenses and capital allowances exceed trading income for a tax year. The loss is not a refund. It is a relief that reduces other taxable amounts, so the tax you save depends on the rate at which the loss is relieved.

The default is carry forward. The loss is set against the first available profits of the same trade, and you cannot restrict it. If you want something faster, you claim against general income. That means income such as employment, property, savings and dividends, taken in the order non-savings, savings, then dividends. A claim is made for the tax year of the loss, the previous tax year, or both in either order. The claim uses as much of the income as it can. You cannot hold back income to protect the personal allowance, so the allowance can be wasted.

Two special reliefs sit on top. An opening-year loss (a loss in any of the first four tax years of a trade) can be set against general income of the three tax years before the loss year, earliest year first. A terminal loss (the loss of the last 12 months of trading) can be set against trading profits of the final tax year and the three years before it, latest year first.

In the exam you are usually asked which option saves the most tax. The method is to compute the tax saved under each option and compare. The best option is usually the one where the loss is relieved at 40% or 45% rather than 20%, or where little personal allowance is wasted. Cash timing may also be a tie-breaker.

Unless otherwise restricted, income tax reliefs, including loss relief against general income, are capped at the higher of £50,000 or 25% of income. Check the cap if a loss is large.

Key rules to remember

Carry forward relief: Loss c/f → first available profits of the same trade, as early as possible; Automatic and cannot be restricted. Relieves trading profits only, so it never touches other income.
Current year / previous year claim: Loss → general income of the loss year and/or the previous year, either order; Claim within 12 months of the 31 January following the end of the loss tax year. The claim for a year takes all the income available, so the personal allowance can be wasted.
Opening-year loss relief: Loss in first 4 tax years → general income of the 3 preceding tax years, earliest first; Same claim deadline as above. Also available against the loss year itself.
Terminal loss relief: Loss of final 12 months → trading profits of the final tax year and the 3 preceding years, latest first; Claim within 4 years of the end of the tax year in which the trade ceased.
Cap on income tax reliefs: Cap = higher of £50,000 or 25% of income; Applies unless otherwise restricted. Figures from the ACCA tax tables.
Tax saved: Tax saved = tax before the claim − tax after the claim; Use this to compare options. Ignore Class 4 NIC unless told otherwise.

How to solve Trading Loss Relief and Choosing the Best Relief questions

Use the same method for any loss relief question. It stops you jumping to a claim before you have compared the options.

1Identify the loss and the tax year it falls in. Check whether it is an opening-year loss or a terminal loss.
2List the income for the loss year and each possible earlier year. Work out the taxable income and tax before any claim.
3List the available options: current year, previous year, both, opening-year years, terminal years, and carry forward.
4For each option, deduct the loss from the relevant income, recompute tax and find the tax saved. Remember the personal allowance is not protected.
5Check for any cap on reliefs and for the order in which income is relieved (non-savings, savings, dividends).
6Compare the tax saved and the timing of the cash. Choose the best option.
7State the claim deadline and the amount of any loss remaining to carry forward.

Quickest way: Marginal rate comparison

When to use it: Use this for objective test questions, or to sense-check a long written answer.

Find the highest rate paid on income in each year you could claim against (20%, 40% or 45%).
Rank the options by the rate at which the loss would be relieved.
Check whether the income in a year is mostly covered by the personal allowance. If so, a claim there wastes the loss.
Pick the option where the loss is relieved at the highest rate with the least waste.
Do a single full calculation only for the top two options if the rates are close.

Common mistakes in Trading Loss Relief and Choosing the Best Relief

Restricting a general income claim to keep the personal allowance.
Students want to avoid wasting the allowance, as they would with a deduction like Gift Aid.
Fix: A claim against general income uses all the income of that year. State that the allowance may be wasted and compare with carry forward.
Using carry forward against other income.
The word 'loss' suggests it can be set against anything.
Fix: Carry forward relief applies only to profits of the same trade.
Applying opening-year relief latest year first.
Confusion with terminal loss relief, which works latest first.
Fix: Opening-year relief goes against the earliest of the three preceding years first. Terminal relief goes latest first.
Missing the time limits.
Students remember the relief but not the deadline.
Fix: Current year/prior year and opening-year claims: 12 months after 31 January following the tax year of the loss. Terminal loss: 4 years after the end of the final tax year.
Choosing the option with the largest immediate deduction, not the largest tax saved.
The loss is deducted in full under every option, so the options look equal.
Fix: Work out the tax saved under each option, then rank them.
Forgetting the cap on income tax reliefs.
The cap is rarely binding, so it is overlooked.
Fix: If the loss exceeds £50,000, compare it with 25% of income and use the higher figure.

Worked examples

Example 1

Anya started trading on 1 June 2025 and made a loss of £24,000 for 2025–26. She has employment income of £60,000 in 2025–26 and £30,000 in 2022–23. Assume the same rates, bands and personal allowance of £12,570 in all years. Which opening-year claim saves more tax: 2025–26 or 2022–23? Ignore NIC.

Show the solution

Option 1: current year 2025–26. Tax before the claim: taxable income is £60,000 − £12,570 = £47,430. Tax is £37,700 × 20% = £7,540 plus £9,730 × 40% = £3,892, so £11,432.
Tax after the claim: income is £60,000 − £24,000 = £36,000. Taxable income is £36,000 − £12,570 = £23,430. Tax is £23,430 × 20% = £4,686.
Tax saved in 2025–26 is £11,432 − £4,686 = £6,746.
Option 2: 2022–23, the earliest of the three preceding years. Taxable income before is £30,000 − £12,570 = £17,430. Tax is £17,430 × 20% = £3,486.
After the claim, income is £30,000 − £24,000 = £6,000, which is below the personal allowance. Tax is nil, so the saving is £3,486.
Part of the loss relieved in 2022–23 is wasted, because it also covers income that was already sheltered by the allowance. The 2025–26 claim relieves £9,730 at 40%.

Answer: Claim against 2025–26 general income. It saves £6,746, compared with £3,486 for 2022–23. The claim must be made within 12 months of 31 January 2027.

Example 2

Ben is an established sole trader. He made a loss of £40,000 in 2025–26. His other income in 2025–26 is property income of £10,000. In 2024–25 his trading profit was £70,000 with no other income. He expects a profit of £60,000 in 2026–27. Assume the same rates and allowances in all years. Which relief saves the most tax? Ignore NIC.

Show the solution

Check the cap: the loss of £40,000 is below £50,000, so the cap does not restrict a claim.
Current year 2025–26: the £10,000 of property income is below the personal allowance, so no tax is payable on it. Deducting the loss saves nil, and £30,000 of the loss is carried forward.
Prior year 2024–25: before the claim, taxable income is £70,000 − £12,570 = £57,430. Tax is £37,700 × 20% = £7,540 plus £19,730 × 40% = £7,892, so £15,432.
After the claim, income is £70,000 − £40,000 = £30,000. Taxable income is £30,000 − £12,570 = £17,430, and tax is £17,430 × 20% = £3,486.
Tax saved by the prior year claim is £15,432 − £3,486 = £11,946.
Carry forward against 2026–27: tax before is £11,432 (as in the previous example, since profit is £60,000). After the loss, profit is £20,000. Taxable income is £7,430, and tax is £1,486. Saving is £9,946.
Compare: current year nil, carry forward £9,946, prior year £11,946.

Answer: Claim against 2024–25 general income. It saves £11,946, against £9,946 for carry forward and nil for the current year. The claim must be made within 12 months of 31 January 2027.

Exam tips

Show the tax saved under each option, not just the choice. Marks are given for the working.
Write down the claim deadline and the order in which years are relieved. They are often worth a mark each.
Say clearly that a general income claim cannot be restricted, and name any personal allowance wasted.
Read the date of commencement or cessation carefully. It tells you whether opening-year or terminal relief is available.
In objective test questions, find the marginal tax rate of each year first. It usually points to the answer.

Practice questions from The use of exemptions and reliefs in deferring and minimising income tax liabilities

Trading Loss Relief and Choosing the Best Relief 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 Loss Relief and Choosing the Best Relief: frequently asked questions

Can a sole trader carry forward a trading loss against other income?

No. A carried-forward trading loss is set only against profits of the same trade. To use it against other income, you must claim against general income for the loss year or the previous year.

Which years can an opening-year loss be relieved against?

A loss in any of the first four tax years of a trade can be set against general income of the three tax years before the loss year, earliest year first. You can also claim against the loss year itself. Claim within 12 months of 31 January after the end of the loss year.

Will a loss claim waste my personal allowance?

It can. A claim against general income is made before the personal allowance is deducted, and you cannot restrict it. This is why you must compare options, including carry forward.

What is a terminal loss?

It is the loss of the last 12 months of trading. It is set against trading profits of the tax year of cessation and the three previous years, latest year first. Claim within 4 years of the end of the tax year of cessation.