Advanced Taxation (UK) · Corporation tax: the use of exemptions and reliefs in deferring and minimising corporation tax liabilities

Trading Losses: Carry Forward, Carry Back and Terminal Relief

Updated 11 October 2026 · Fact-checked

A company's trading loss can be set against total profits of the same period, carried back 12 months, or carried forward against later total profits, where a £5 million deduction allowance plus 50% of excess profits limits the relief. On cessation, the final 12 months' loss can be carried back 3 years. You choose the order that saves most tax or cash.

Understand Trading Losses: Carry Forward, Carry Back and Terminal Relief

A trading loss arises when allowable expenses and capital allowances exceed trading income for an accounting period. A company cannot just ignore it. The loss is a relief that you must claim, and where you use it decides how much tax you save and how soon.

There are three main routes. First, the current year claim: set the loss against total profits (trading profit, property income, interest, gains) of the same accounting period. Second, a carry back claim: any loss left after the current year claim can be set against total profits of the previous 12 months, latest period first. Third, carry forward: any loss not claimed earlier is set against total profits of later periods, as long as the trade continues. Current year and carry back claims are made for the loss period, and a claim must be made within two years of its end.

Carry forward relief is restricted. Each company or group has a deduction allowance of £5 million of profits a year. Above that, loss relief is limited to 50% of the remaining profits. The allowance is shared across a group, so it matters for large groups. It is pro-rated for short accounting periods. Most exam companies are far below £5 million, so the restriction is normally only a point to mention, unless the scenario gives large profits.

When a company ceases to trade, the loss of the final 12 months (the terminal loss) can be carried back against total profits of the previous 3 years, latest period first. This is more generous than the 12-month carry back, and the loss cannot be carried forward because the trade has ended. Losses can also be surrendered to other group companies as group relief, which gives another route.

In ATX the question is rarely just to compute a relief. It is to advise which route gives the best result. Look at the tax rate on the profits you would relieve, the cash timing (a carry back gives a repayment now), and whether any profits would be wasted by relieving them too early. Use the tax tables provided for the rates.

Key rules to remember

Trading loss: Trading loss = allowable expenses and capital allowances − trading income (when the result is negative); Capital allowances are part of the computation, so they can create or increase a loss.
Current year claim: Loss set against total profits of the same accounting period; Made first. The loss comes off total profits before qualifying charitable donations, so those donations can be wasted.
Carry back (general): Loss left after current year claim → total profits of the previous 12 months, latest first; Needs a current year claim first. Where the previous accounting period only partly falls within the 12 months before the loss period, its total profits are time-apportioned to find the profits available.
Carry forward: Unrelieved loss → total profits of later periods, subject to deduction allowance; Trade must continue. Losses carried forward can be set against total profits, not only trading profits.
Deduction allowance: Relief = first £5,000,000 of profits + 50% × (profits − £5,000,000); Applies to carried-forward losses. The allowance is shared across a group and is time-apportioned for short periods.
Terminal loss: Terminal loss = loss of the last 12 months of trading, carried back 3 years, latest period first; Applies only on cessation. Loss periods are time-apportioned, and any overlap with earlier periods is apportioned too.
Corporation tax rates (given): Small profits rate 19% (profits up to £50,000); main rate 25% (over £250,000); marginal relief = (£250,000 − augmented profits) × 3/200 × taxable total profits ÷ augmented profits; Use these to value a relief. Relief at the 25% or marginal band saves more than relief at 19%.

How to solve Trading Losses: Carry Forward, Carry Back and Terminal Relief questions

Use the same method whenever you are asked to advise on loss relief for a company.

1Calculate the trading loss for the period, including capital allowances. Note whether the company is continuing or ceasing.
2List total profits for the loss period and for the previous 12 months (and 3 years if the trade ceases). Include property income, interest and gains.
3Apply the current year claim first and state the amount relieved.
4Apply the carry back of up to 12 months, latest period first. If the trade ceases, use terminal loss relief over 3 years for the final 12-month loss.
5If a loss remains and the trade continues, show the carry forward and check the £5 million allowance and 50% restriction.
6Compute the tax saved or repayment under each option, using the rates given, including marginal relief where taxable profits are between £50,000 and £250,000.
7Recommend the option that saves the most tax or gives the earliest cash, and state the claim deadline. Consider group relief if other group companies are profitable.

Quickest way: Order-of-use and tax-value shortcut

When to use it: When a Section A or B question asks you to advise on loss relief and time is short.

Write one line per period: profit available and tax rate that would apply.
Fill the periods in strict order: current year, then previous 12 months, then (if ceasing) the earlier years latest first.
Value each slice at the tax rate of the profits it removes. For profits between £50,000 and £250,000, remember the effective marginal rate is higher than 25%, so say so rather than calculating every figure unless asked.
If the trade continues and the loss is carried forward, state that it is set against total profits and check whether profits exceed £5 million.
Finish with a clear recommendation and the two-year claim deadline.

Common mistakes in Trading Losses: Carry Forward, Carry Back and Terminal Relief

Carrying a loss back without making a current year claim first.
Students focus on the repayment and forget the claim order.
Fix: State the current year claim first, even if the amount is small. Carry back is only for the loss left over.
Using the terminal loss 3-year carry back when the company has not ceased to trade.
Students confuse the 12-month general carry back with the terminal relief.
Fix: Terminal relief applies only when the trade ends. For a continuing trade, the carry back is 12 months.
Forgetting to time-apportion the loss to find the final 12 months.
The final period is often shorter than 12 months, so earlier periods contribute part of the loss.
Fix: Add the final period loss to the relevant fraction of the previous period's loss to make up 12 months.
Applying the £5 million allowance to every question.
Students remember the figure and apply it automatically.
Fix: Use it only for carry forward relief, and only where profits are near or above £5 million, or where the group allowance is shared.
Ignoring the tax rate when advising which profits to relieve.
Students relieve in the statutory order and stop.
Fix: Value each slice of relief. Then compare options such as group relief against carry back, and say which gives the larger saving or earlier cash.
Missing that qualifying charitable donations can be wasted by a current year claim.
Loss relief is deducted before donations, and students deduct donations first.
Fix: Deduct the loss first, then donations. If profits are nil, note that the donations are wasted.

Worked examples

Example 1

Brook Ltd (no associated companies) has a trading loss of £180,000 for the year ended 31 March 2026. It has property income of £30,000 in that year. For the year ended 31 March 2025 it had trading profits of £120,000, property income of £20,000 and a chargeable gain of £10,000, with no dividends. Show how the loss is relieved and the tax repaid.

Show the solution

Current year: set the loss against total profits of £30,000 (property income). Loss remaining: £180,000 − £30,000 = £150,000.
Carry back: total profits for the previous 12 months, the year ended 31 March 2025, are £120,000 + £20,000 + £10,000 = £150,000.
Set £150,000 of the remaining loss against these profits. Taxable total profits become nil and no loss is left to carry forward.
Tax originally paid for the year ended 31 March 2025: £150,000 × 25% = £37,500.
Marginal relief: (£250,000 − £150,000) × 3/200 × (£150,000 ÷ £150,000) = £100,000 × 3/200 = £1,500.
Tax paid = £37,500 − £1,500 = £36,000, all of which is repaid.

Answer: £30,000 is relieved in the current year and £150,000 is carried back, so the loss is fully used. Tax of £36,000 for the year ended 31 March 2025 is repaid.

Example 2

Cairn Ltd (no associated companies) ceases to trade on 31 March 2026. Its final 12-month period to 31 March 2026 shows a trading loss of £90,000 and no other income. Total profits were: year ended 31 March 2025 £70,000; year ended 31 March 2024 £60,000; year ended 31 March 2023 £30,000. Show how terminal loss relief works and the tax saved. Ignore any other claims.

Show the solution

The final accounting period is the whole 12 months, so the terminal loss is £90,000. There are no other profits in the loss period.
Carry back 3 years, latest period first. First, year ended 31 March 2025: relieve £70,000. Taxable total profits become nil. Loss remaining: £20,000.
Tax saved for 2025: £70,000 × 25% = £17,500, less marginal relief (£250,000 − £70,000) × 3/200 = £2,700, giving £14,800.
Next, year ended 31 March 2024: relieve the £20,000 left. Taxable profits fall from £60,000 to £40,000.
Tax before: £60,000 × 25% = £15,000, less marginal relief (£250,000 − £60,000) × 3/200 = £2,850, giving £12,150.
Tax after: £40,000 is below £50,000, so it is taxed at the small profits rate: £40,000 × 19% = £7,600. Tax saved: £12,150 − £7,600 = £4,550.
Total tax repaid: £14,800 + £4,550 = £19,350. The loss is fully used and the year ended 31 March 2023 is untouched.

Answer: The full £90,000 terminal loss is relieved: £70,000 against 2025 and £20,000 against 2024. The total repayment is £19,350.

Exam tips

Read whether the company is continuing or ceasing. That one fact changes whether you use carry forward or terminal relief.
Use the tax tables for rates and the marginal relief formula. Do not quote rates from memory when the tables give them.
Show the order of relief in a short table of periods: profit, relief used, profit left. It is easy to mark and keeps you clear under pressure.
Always add a recommendation with a reason (tax saved, cash timing, or lost relief), as professional skills marks reward clear advice, not just calculations.
Mention group relief when other group companies are profitable, and remember the £5 million allowance is shared across a group.

Practice questions from Corporation tax: the use of exemptions and reliefs in deferring and minimising corporation tax liabilities

Trading Losses: Carry Forward, Carry Back and Terminal Relief in other exams

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

Trading Losses: Carry Forward, Carry Back and Terminal Relief: frequently asked questions

What is the difference between current year and carry forward loss relief for a company?

A current year claim sets the loss against total profits of the same accounting period, so it gives the quickest relief. Carry forward sets the unrelieved loss against total profits of later periods, and it is subject to the £5 million deduction allowance and 50% restriction. Carry forward is only available while the trade continues.

How does terminal loss relief work for a company?

When a company stops trading, the loss of its final 12 months can be carried back against total profits of the previous 3 years, latest period first. This is longer than the normal 12-month carry back. You may need to time-apportion losses from two accounting periods to get the 12 months.

What is the £5 million loss restriction?

For losses carried forward, a company or group can use losses against profits in full up to a deduction allowance of £5 million a year. Above that, relief is limited to 50% of the profits over £5 million. In a group, the allowance is shared between the companies.

Can I carry a loss back without using it in the current year?

No. The current year claim must come first, and the carry back applies to the loss left over. You can still choose not to claim the carry back and carry the remainder forward instead, if that is better.