Advanced Taxation (UK) · Income tax: income from self-employment

Trading Losses and Relief Options for ACCA Advanced Taxation

Updated 11 October 2026 · Fact-checked

You can carry a trading loss forward against the same trade, set it sideways against total income of the loss year and/or the previous year, or carry it back three years if it arises in the first four years. On cessation, the final 12 months' loss goes against trading profits of the year of cessation and the three preceding years. Sideways and early years claims face the reliefs cap.

Understand Trading Losses and Relief Options

A trading loss arises when the tax-adjusted result of a trade for a basis period is negative. You do not get a refund directly. You choose how to use the loss, and the best choice depends on your client's income in other years, tax rates, and how fast the cash benefit is needed.

There are four routes. Carry forward uses the loss against the first available profits of the same trade. Sideways relief (often called s64 relief) sets the loss against total income of the loss year and/or the previous tax year. Early years relief applies to losses in the first four tax years of a new trade. It sets the loss 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 final 12 months against trading profits of the tax year of cessation and the three preceding tax years, latest year first.

The key trade-off is the personal allowance. Sideways and early years relief reduce total income before the personal allowance is given. If income falls below £12,570, the allowance is partly or wholly wasted. Carry forward is also deducted from trade profits before the allowance, but it is spread over time, so the waste may be smaller. Always compare tax saved, not just the size of the loss relieved.

The cap on income tax reliefs limits sideways and early years relief used in a tax year to the higher of £50,000 or 25% of income. Carry forward against the same trade and terminal loss relief are not subject to it. Any loss you cannot relieve under the cap can still be carried forward against future profits of the same trade.

In the exam, the question usually asks you to advise. You must set out the options, compute the tax effect of each, apply the cap, note the claim deadlines, and recommend one. That recommendation earns the professional skills marks.

Key rules to remember

Carry forward relief: Loss c/f deducted from first available profits of the SAME trade, as much as possible; Carry forward is a claim against the first available profits of the same trade. There is no time limit on use. The claim is made within four years of the end of the tax year in which the profits arise against which the loss is relieved. You cannot choose to use only part of the profits to protect the personal allowance.
Sideways relief (s64): Loss set against total income of year of loss and/or previous year, before the personal allowance; You choose the year order. Claim by 12 months after 31 January following the end of the loss tax year. Within a year, you cannot restrict the claim to save the personal allowance.
Early years relief: Loss in any of the first four tax years set against total income of the previous three tax years, earliest first; Same claim deadline as sideways relief. Both are subject to the cap.
Terminal loss relief: Loss of final 12 months set against trade profits of year of cessation and previous three tax years, latest first; Unrelieved overlap relief is deducted in computing the final basis period profit or loss, which can increase the terminal loss. Only trading profits, not other income. Not subject to the cap.
Cap on income tax reliefs: Maximum relief in a tax year = higher of £50,000 or 25% × income; Income here is total income before the reliefs, adjusted as the question directs. Applies per tax year to sideways and early years claims. Taken from ACCA's tax tables.
Claim deadline for 2025/26 sideways or early years loss: 31 January 2028; Twelve months after the normal filing date of 31 January 2027.

How to solve Trading Losses and Relief Options questions

Use this order for any trading loss question. It keeps you on the requirement and shows your reasoning.

1Compute the loss for the tax year using the basis period rules. For the final basis period, deduct any unrelieved overlap relief, which can increase the terminal loss.
2List the client's income and profits for each relevant year: loss year, previous year, and for early years or terminal relief, the three years before.
3Identify which reliefs are available: carry forward always, sideways if the trade is run commercially, early years only in the first four tax years, terminal only on cessation.
4Apply the cap per tax year to sideways and early years claims: the higher of £50,000 or 25% of income. Carry any loss above the cap forward.
5Compute the tax saved under each option. Watch for wasted personal allowance and the rate at which income would otherwise be taxed (20%, 40%, 45%).
6Recommend the option with the best result and say why. Mention cash flow, the personal allowance and any alternative such as carry forward.
7State the claim deadline and any remaining loss carried forward.

Quickest way: Loss relief decision grid

When to use it: Use this when a Section A scenario gives several years of income and you need a recommendation fast.

Write a small table: years across the top, income less relief below.
Mark the years where income is taxed at 40% or 45%. Relief there saves most tax.
Check each year against the cap: higher of £50,000 or 25% of income.
Flag years where relief would push income under £12,570. The personal allowance is wasted.
Choose the year with the highest tax rate within the cap, then carry any remainder forward.

Common mistakes in Trading Losses and Relief Options

Applying the cap to carry forward or terminal loss relief.
Students remember that the cap limits loss reliefs generally.
Fix: Apply the cap only to sideways and early years relief. Carry forward and terminal relief are outside it.
Using the early years carry back in the wrong order.
Students mix it up with terminal relief.
Fix: Early years: earliest of the three previous years first. Terminal: latest year first.
Ignoring wasted personal allowance.
Students maximise the loss relieved rather than the tax saved.
Fix: Compute tax before and after relief in each year and point out when carry forward would give better value.
Setting a terminal loss against non-trading income.
Confusion with sideways relief.
Fix: Terminal loss relief is against trading profits of the same trade only.
Missing the claim deadline or the commercial-trade condition.
Students focus on the calculation.
Fix: State the 12-month deadline after 31 January following the loss year for sideways and early years claims, and note that sideways relief needs a trade run on a commercial basis.
Applying the £50,000/25% cap to the total across all years.
Students read it as a lifetime limit.
Fix: Apply it separately to each tax year in which relief is claimed.

Worked examples

Example 1

Ravi made a trading loss of £120,000 for 2025/26. His other income in 2025/26 was property income of £40,000. In 2024/25 he had trading profits of £70,000. Assume 2025/26 rates and the cap apply to both years. How much loss can be relieved sideways, and what happens to the rest?

Show the solution

The cap applies to the relief claimed in each year, and relief can never exceed the income available in that year.
2025/26 cap: higher of £50,000 or 25% × £40,000 = £10,000, so £50,000. Income is only £40,000, so relief is limited to the income available, £40,000.
Loss remaining: £120,000 − £40,000 = £80,000.
2024/25 cap: higher of £50,000 or 25% × £70,000 = £17,500, so £50,000. Income is £70,000, so relief is limited by the cap to £50,000.
Loss remaining: £80,000 − £50,000 = £30,000.
The £30,000 can be carried forward against future profits of the same trade. The cap does not apply to carry forward.
Note: 2025/26 taxable income falls to nil and the personal allowance is wasted. Advise comparing with carry forward.

Answer: £90,000 is relieved sideways (£40,000 in 2025/26 and £50,000 in 2024/25). The remaining £30,000 is carried forward against future profits of the same trade.

Example 2

Meera started trading on 6 April 2025 and made a loss of £30,000 for 2025/26. Her total income was £20,000 in 2022/23 and £45,000 in 2023/24, all non-savings income. Compute the tax saved by an early years loss relief claim against the previous three years (2022/23, 2023/24 and 2024/25). Assume 2025/26 rates and allowances apply in every year: personal allowance of £12,570 and a basic rate of 20% on the first £37,700. Her 2024/25 income is not given because the loss is used up before that year.

Show the solution

The three years before the loss year are 2022/23, 2023/24 and 2024/25. Early years relief is taken against the earliest year first: 2022/23.
Cap check: relief claimed in each year is below £50,000, so the cap does not restrict the claim.
2022/23: relief = £20,000, the whole of her income. Taxable income falls to nil.
Tax originally: (£20,000 − £12,570) = £7,430 × 20% = £1,486. Tax saved: £1,486.
Loss remaining: £30,000 − £20,000 = £10,000, set against 2023/24.
2023/24: income £45,000 − £10,000 = £35,000. Taxable: £35,000 − £12,570 = £22,430 × 20% = £4,486.
Tax originally: (£45,000 − £12,570) = £32,430 × 20% = £6,486. Tax saved: £2,000.
The loss is now fully relieved, so 2024/25 is not needed.
Total tax saved: £1,486 + £2,000 = £3,486. Note the 2022/23 personal allowance is wasted, which reduces efficiency.

Answer: Total tax saved is £3,486 (£1,486 for 2022/23 and £2,000 for 2023/24). The claim must be made by 31 January 2028.

Exam tips

Always state the cap calculation, even when it does not bite. It earns easy marks.
Write the order of relief clearly: earliest first for early years, latest first for terminal.
Compare options by tax saved, not loss used, and mention wasted personal allowance.
Quote the claim deadlines when advising, and state any loss carried forward.
For a recommendation, link it to the client's circumstances such as rate of tax, need for cash, and expected future profits.

Practice questions from Income tax: income from self-employment

Trading Losses and Relief Options 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 and Relief Options: frequently asked questions

What is the difference between s64 relief and terminal loss relief?

Section 64 relief is sideways relief against total income of the loss year and/or the previous year, subject to the cap. Terminal loss relief applies only on cessation, covers the final 12 months' loss, and is set against trading profits of the last four tax years, latest first, without the cap.

How does early years loss relief carry back 3 years work?

A loss in any of the first four tax years is set against total income of the three tax years before the loss year, earliest first. You claim within 12 months of 31 January following the end of the loss year.

Does the cap on income tax reliefs apply to carried-forward trading losses?

No. The cap applies to sideways and early years relief, not to carrying a loss forward against profits of the same trade or to terminal loss relief. The cap is the higher of £50,000 or 25% of income, applied each tax year.

Can I restrict sideways relief to protect my personal allowance?

No. Once you claim, relief is given against total income before the personal allowance, to the extent income is available. If this would waste the allowance, consider carry forward instead.