A trading loss that has not been relieved in any other way can be carried forward under section 83 of the Income Tax Act 2007 and set against later profits of the same trade, using the first available profits each year until it is used up. If you transfer the business to a company wholly or mainly for shares, section 86 lets you set those losses against income you receive from the company, such as salary and dividends, for as long as you keep the shares and the company carries on the trade.

When do losses get carried forward?

Carry forward is the fallback relief. Section 83(1) of the Income Tax Act 2007 (ITA 2007) applies where you have made a loss in a trade and relief has not been fully given under any other provision, such as a sideways claim against other income or a capital gains claim under section 261B of the Taxation of Chargeable Gains Act 1992. Whatever is left, the “unrelieved loss”, is carried forward. It applies to professions and vocations as well as trades (section 83(5)), and to sole traders, partners and trustees (HMRC’s Business Income Manual at BIM85060).

Carry forward still needs a claim. BIM85065 states that relief for trade losses requires a formal claim. BIM85070 says a carry forward claim should be made in a return where possible, but HMRC’s helpsheet HS227 confirms a claim to carry losses forward may be made up to four years after the end of the year of the loss, using a stand alone claim once the return can no longer be amended.

How are carried forward losses used?

Section 84 sets out the steps. The loss is deducted from the profits of the trade of the next tax year, then any balance from the following year’s profits, and so on until it has all been used. There is no time limit on how long the loss can be carried forward while the same trade continues.

You do not get to choose when to use it. BIM85060 says losses must be set against the first year in which a profit arises, with any balance going to the next profitable year. BIM85080 confirms that partial claims are not permitted, so you cannot keep part of the loss back to protect your personal allowance. Section 83(4) also says the carried forward loss is deducted from the trade profits before any other reliefs are set against those profits.

If trade profits are too low, section 85 treats interest and dividends that would have been trade receipts, but for being taxed under other rules, as profits of the trade. Section 88 allows unrelieved interest that qualified for relief as a trade expense under section 383 to be carried forward as if it were a loss.

What does “the same trade” mean?

Section 83(3) only allows the deduction from profits of the trade that made the loss. BIM85060 says carry forward is allowed provided the ownership and identity of the business stay the same as in the loss period, citing cases such as Rolls Royce Motors Ltd v Bamford. In practice:

  • losses from one business cannot be used against profits of a different business you run alongside it;
  • if the old trade ends and a genuinely new one starts, losses of the old trade cannot be carried into the new one;
  • for partners, HS227 treats each partner’s share as a separate notional trade, so losses follow the partner rather than the firm;
  • section 17(3) of the Income Tax (Trading and Other Income) Act 2005 allows losses made before a change of residence to be carried forward against profits arising after it, even though the trade is treated as ceasing and restarting.

When a trade ends for good there are no future profits, so carried forward losses fall away. The final year’s losses may instead qualify for terminal loss relief.

Are carried forward losses restricted like sideways claims?

Mostly not. The cap on reliefs in section 24A ITA 2007 does not apply to losses relieved against profits of the same trade (BIM85703); see the cap on unlimited income tax reliefs. The £25,000 annual limit for non active traders in section 74A does not affect relief against profits of the same trade (section 74A(8)). Even a loss caught by the tax avoidance rule in section 74ZA can still be carried forward against profits of the same trade, according to BIM85762. This makes carry forward the natural home for any loss that a sideways claim cannot use; see loss restrictions for non active traders.

What happens to losses when I incorporate?

Trading losses belong to you as an individual and do not pass to a company that takes over your business. Section 86 ITA 2007, often called pre incorporation loss relief, lets you keep using them. It applies if:

  • the trade was carried on by you as a sole trader or by individuals in partnership;
  • the trade is transferred to a company;
  • the consideration is wholly or mainly the allotment of shares to you; and
  • your total income for a relevant tax year includes income derived from the company.

That income is then treated as profits of the trade, so your carried forward losses can be set against it. Section 86(5) says the income may be dividends on the shares or otherwise, and BIM85060 lists dividends, interest, remuneration and rent received from the company.

A tax year is relevant only if you remain the beneficial owner of the shares and the company carries on the trade: for the year of transfer, from the transfer date to the next 5 April, and for later years, throughout the tax year (section 86(3) and (4)). BIM85060 adds that where the agreement expresses the consideration as cash but the whole amount is subscribed for shares, the shares may be treated as the consideration, and that in practice relief should not be refused while you keep shares representing more than 80% of the consideration received for the business. HS227 says the relief for each year is the lower of the losses carried forward and your income from the company.

Incorporation also has capital gains consequences; see incorporation relief and sole trader versus limited company.

A worked example

Illustration only. Sam has trading losses of £20,000 carried forward at 5 April 2025. On 1 October 2025 he transfers his business to a new company in exchange for shares and keeps all of them. His trade profits from 6 April to 30 September 2025 are £6,000. From the company in 2025 to 2026 he receives salary of £9,000 and dividends of £10,000.

  • Section 83: £6,000 of the loss is set against his final sole trade profits, leaving £14,000.
  • Section 86: 2025 to 2026 is a relevant year because Sam owns the shares and the company carries on the trade from the transfer to 5 April 2026. His £19,000 of company income is treated as trade profits, and the remaining £14,000 is used.

Had his company income been only £5,000, £9,000 would carry forward against company income of later years, provided the conditions continue to be met.

Does National Insurance follow the same losses?

HMRC’s National Insurance Manual at NIM24610 says Class 4 losses are relieved in the same way as for income tax under section 83. But where a loss was used for income tax against income not liable to Class 4, such as employment income, that part remains available to carry forward against future Class 4 profits of the trade. Your Class 4 losses carried forward can therefore be larger than your income tax losses.

What should I record and what goes wrong?

HS227 includes a working sheet to track losses and recommends a separate sheet for each trade. Keep a running record of each year’s loss, how much was used and where, and the balance carried forward for both income tax and Class 4. Common errors include:

  • setting carried forward losses against a different trade or against salary from an unconnected employer;
  • skipping a profitable year to save the loss for a higher rate year;
  • forgetting the losses after incorporation because the sole trader return has stopped;
  • selling or giving away the shares received on incorporation, which ends section 86 relief for later years;
  • losing track of a separate Class 4 loss balance.

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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.