If you make a trading loss in the tax year your business starts or in any of the next three tax years, section 72 of the Income Tax Act 2007 lets you carry it back against your total income of the three tax years before the loss year, starting with the earliest. The trade must be run commercially so that profits could reasonably be expected within a reasonable time, and the claim is due by the first anniversary of the normal filing date for the loss year.

Why does early years relief exist?

New businesses often lose money while they build up customers, and many people start trading after leaving employment, when their previous years’ income was taxed under PAYE. Ordinary sideways relief under section 64 only reaches back one year (see using a trading loss against other income). Early trade losses relief under section 72 of the Income Tax Act 2007 (ITA 2007) reaches back three years, so a new trader can recover tax paid in earlier employment. Where the earlier years were taxed at a higher rate than the loss year would be, it can also produce a larger repayment.

Who can claim?

Section 72(1) allows an individual to claim if they make a loss in a trade in the tax year in which the trade is first carried on by them, or in any of the next three tax years. HMRC’s Business Income Manual at BIM85045 confirms the relief is for individuals, whether sole traders or partners, but not trustees. It applies to professions and vocations (section 72(4)), and BIM85045 notes it applies to farming.

The four year window runs from when you first carry on that particular trade:

  • Breaks in trading. BIM85050 explains that if you stop for a while and then restart the same business, you do not get a fresh four years unless the break was a permanent cessation and a new trade began.
  • A genuinely new business. “First carried on” refers to the specific business, not the type of work. HMRC’s example is a publican who sells a pub in Leeds and buys one in York: the York pub is a new trade and qualifies.
  • Partners. HMRC’s helpsheet HS227 says a partner’s share of a partnership loss is treated as a trade carried on alone, starting on the date they became a partner. A partner who leaves and later rejoins counts from the date they first joined (BIM85050).
  • Spouses and civil partners. Section 74(4) and (5) block relief if you take over a trade previously carried on by a spouse or civil partner you live with, and the loss falls after the four years counted from when your partner first carried it on.

How does the carry back work?

Section 73 sets the order. The loss is deducted from net income of the earliest of the three years first, then the next year, then the latest. You cannot pick which of the three years to use, and HMRC’s guidance at BIM85080 confirms that partial claims are not permitted, so the loss is set against as much income as possible in each year in turn, even if that wastes a personal allowance. Any loss left after the three years can be used in another relief, such as a section 64 claim or carry forward against later profits of the trade.

The deduction is from total income, not just trading income, which is why it suits people with salary in earlier years. HS227 asks you to show the amount of loss used for each earlier year and the decrease in tax, calculated as the difference between the actual liability for each earlier year and the liability with the loss included. The repayment therefore reflects the earlier years’ rates and allowances.

Section 72 relief counts towards the limit in section 24A, which caps certain reliefs at the greater of £50,000 and 25% of adjusted total income for each year. See the cap on unlimited income tax reliefs. Unlike section 64, early years relief cannot be extended to capital gains: section 261B of the Taxation of Chargeable Gains Act 1992 refers only to sections 64 and 128.

What is the commerciality condition?

Section 74(1) and (2) deny relief unless the trade is carried on throughout the tax year on a commercial basis and in such a way that profits could reasonably be expected in that year or within a reasonable time afterwards. If the trade forms part of a larger undertaking, profits of the whole undertaking are considered.

HMRC’s guidance at BIM85735 says that the words “reasonably” and “reasonable” make this a tougher test than the general test in section 66. HMRC’s view is that a reasonable time depends on the nature of the trade but would generally be “a fairly short period of say a year or so”. The test is applied for each year claimed. HMRC says it will challenge claims where an activity looks like a sideline or hobby, giving as warning signs recurring production costs that clearly cannot be recovered from sales, and overheads such as private car and household costs that are out of proportion to the expected income. A business plan and evidence of how you priced and marketed the work are the best answer to such a challenge.

Which loss years qualify now?

Since 2024 to 2025 trading profits and losses are measured for the tax year itself, apportioning accounts where the accounting date is not 5 April (BIM85005). Counting the four years under section 72(1), a loss for 2025 to 2026 qualifies only if the trade was first carried on in 2022 to 2023 or later. Section 74(2) also now tests commerciality throughout the tax year rather than a basis period. See basis period reform explained.

Spending before you open for business can feed into the first year’s loss. Section 57 of the Income Tax (Trading and Other Income) Act 2005 treats revenue expenses incurred for the trade up to seven years before it starts as incurred on the first day of trading. See pre trading expenses.

What is the deadline?

Section 72(3) requires the claim on or before the first anniversary of the normal Self Assessment filing date for the tax year in which the loss is made. HMRC’s table at BIM85075 describes this as within 12 months of 31 January following the loss year. A loss for 2025 to 2026 must therefore be claimed by 31 January 2028. BIM85070 confirms the claim can be made outside a tax return as a stand alone claim, and even before the return for the loss year is filed.

A worked example

Illustration only. Tom left employment and started a joinery business on 6 May 2025. For 2025 to 2026 the business makes a tax adjusted loss of £24,000. His earlier income was all employment income:

Tax year Total income Section 72 claim
2022 to 2023 £15,000 £15,000
2023 to 2024 £30,000 £9,000
2024 to 2025 £35,000 nil

The loss must go to 2022 to 2023 first, even though most of that year’s income was covered by his personal allowance. The alternative is a section 64 claim against 2024 to 2025 income, which would use the whole £24,000 against his highest earning year. Tom can claim one or the other for this loss, or a combination where one claim leaves a balance; each pound of loss is relieved once only (BIM85080). He should compare the tax saving under each route before choosing.

How does it interact with other reliefs?

  • BIM85010 notes that section 72 relief was not available for losses of 2013 to 2014 through 2023 to 2024 calculated on the cash basis.
  • If you also claim share loss relief for the same year, section 131 relief is given before section 72 (BIM85045); see share loss relief against income.
  • Section 74ZA denies early years relief for losses arising from tax avoidance arrangements, and section 74A limits it for traders spending less than ten hours a week in the trade; see loss restrictions for non active traders.
  • Losses not relieved sideways can be carried forward against later profits of the same trade.

What mistakes should I avoid?

  • Assuming you can choose which of the three earlier years to use.
  • Claiming for a loss after the fourth tax year of trading.
  • Treating a restart after a break, or joining a spouse’s business, as a new trade.
  • Claiming for a side activity with no realistic prospect of profit within a short period.
  • Leaving the claim until after the deadline while waiting for final accounts.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.