If you own a trade as a sole trader but spend on average less than 10 hours a week personally working in it, section 74A of the Income Tax Act 2007 limits the trading losses you can set against other income and gains to £25,000 a tax year. Separately, section 74ZA denies sideways relief altogether for losses that arise from arrangements with a main purpose of cutting tax through loss relief. Losses held back by either rule can still be carried forward against profits of the same trade.

Why do these rules exist?

Sideways loss relief lets a trading loss reduce tax on salary, investment income and gains (see using a trading loss against other income). That made trading losses attractive to people with high incomes who invested in a business run by others, and to promoters who designed schemes producing losses on paper. HMRC’s Business Income Manual at BIM85765 describes sections 74A to 74D of the Income Tax Act 2007 (ITA 2007) as anti avoidance measures that largely mirror the earlier restrictions for non active partners, and BIM85761 describes section 74ZA as the targeted rule against tax generated losses.

Who is a non active trader?

Section 74C(1) says an individual carries on a trade in a non active capacity during a tax year if they carry on the trade at some time in the year and do not devote a significant amount of time to it in the relevant period. Under section 74C(2), a significant amount of time means an average of at least 10 hours a week personally engaged in activities of the trade, where those activities are carried on on a commercial basis and with a view to the realisation of profits.

The relevant period, as substituted from 2024 to 2025 by Finance Act 2022, is normally the tax year. If the trade started less than six months before the end of the tax year, it is the six months from the start date; if it ceased less than six months after the start of the tax year, it is the six months ending on cessation (section 74C(3)).

Three points about scope:

  • Section 74A applies to an individual carrying on a trade “otherwise than as a partner in a firm”. Partners have parallel rules in sections 103B and 103C, which apply the same ten hour test and a £25,000 cap to non active partners and limited partners. See limited liability partnerships.
  • BIM85765 states that the annual limit does not apply to professions or vocations, or to companies.
  • The cap does not apply to losses from a Lloyd’s underwriting business (section 74A(9)) or to losses deriving from qualifying film expenditure (section 74A(7) and section 74D).

How does the £25,000 cap work?

Section 74A(3) and (4) limit the total sideways relief and capital gains relief given for all of an individual’s affected losses in a tax year to £25,000. Sideways relief means relief against general income under section 64 and early trade losses relief under section 72 (section 60(4)); capital gains relief means treating the loss as a capital loss under section 261B of the Taxation of Chargeable Gains Act 1992 (section 74A(10)).

  • One cap for all trades. The £25,000 covers all trades carried on in a non active capacity in the year.
  • Shared with partnership losses. Section 74A(6) reduces the cap by any sideways relief given for a loss restricted under section 103C as a non active or limited partner.
  • Same trade relief is unaffected. Section 74A(8) says the cap does not affect relief against profits of the same trade. BIM85766 adds that where a loss is claimed against total income of another year, relief is treated as given first against income from the same trade, and only the balance is capped.
  • Order of restrictions. BIM85766 says the cap applies after the other restrictions, such as the commercial test and the capital allowances rules, and BIM85765 says tax generated losses should be considered first. The general cap of £50,000 or 25% of adjusted total income in section 24A applies on top; see the cap on unlimited income tax reliefs.

BIM85765 says the cap has effect for losses made on or after 12 March 2008, and that under self assessment you are responsible for limiting your own claim.

What if I claimed relief and then failed the ten hour test?

Relief is often claimed before the year ends, for example when a new trader carries back a loss. Section 74C(5) deals with this: if relief is given on the assumption that you devoted, or would devote, a significant amount of time to the trade, and you did not, the relief is withdrawn by an assessment to income tax. The law does not prescribe how hours must be evidenced, but a diary or time record of your personal work in the business is the obvious evidence if HMRC enquires. Only time spent personally counts, so work done by employees or a manager is excluded.

What are tax generated losses?

Section 74ZA applies where a person carrying on a trade, profession or vocation, alone or in partnership, makes a loss that arises directly or indirectly in consequence of, or in connection with, relevant tax avoidance arrangements. These are arrangements to which the person is a party and whose main purpose, or one of whose main purposes, is obtaining a reduction in tax liability by means of sideways relief or capital gains relief. “Arrangements” includes any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable.

No sideways relief or capital gains relief is given for such a loss, but BIM85762 confirms it may still be carried forward against profits of the same trade. The rule applies to arrangements entered into on or after 21 October 2009. HMRC’s examples show the line: a contrived partnership loss from a marketed scheme designed to shelter an employment bonus is caught, while an ordinary trader whose loss comes from a customer defaulting, or a professional partnership loss from an uninsured negligence payment, is not. BIM85762 notes that the fact a tax reduction follows from a claim does not by itself make it a main purpose.

Schemes producing such losses may also be disclosable and open to other counter avoidance powers; see DOTAS scheme reference numbers and the general anti abuse rule.

Which other rules restrict losses?

  • Leasing capital allowances. Under section 75 ITA 2007, the part of a loss deriving from capital allowances on plant or machinery for leasing cannot be relieved sideways unless the trade runs for at least six months and substantially the whole of the claimant’s time is given to it. BIM85730 says HMRC should not readily accept this where the person is in full time employment, runs another business or spends less than 30 hours a week on the trade, a much higher bar than the ten hour test.
  • First year and annual investment allowance schemes. Sections 76 to 79 deny sideways relief for losses created by these allowances in certain partnership and asset transfer arrangements (BIM85750).
  • Contrived losses. BIM85740 tells HMRC officers to refer suspected artificial losses to Counter Avoidance, listing signs such as non recourse finance and a new business started just before the tax year with a large loss.

A worked example

Illustration only. Helen works full time as an employee. She also owns an equipment hire business run day to day by a manager, and spends about four hours a week on it herself. In 2025 to 2026 the business is run commercially but makes a tax adjusted loss of £40,000. She has no partnership losses.

  • Helen is a non active trader because she averages fewer than 10 hours a week.
  • Her section 64 claim against her salary is limited to £25,000.
  • The remaining £15,000 is carried forward against future profits of the hire business; see carrying forward trading losses.
  • The general section 24A cap is at least £50,000, so with no other capped reliefs it does not reduce the claim further.

Had Helen started the business in 2025 to 2026, the same cap would apply to an early years trade loss relief claim.

What mistakes should I avoid?

  • Counting time spent by staff, a manager or a spouse towards your own ten hours.
  • Applying the £25,000 cap separately to each trade instead of once across all of them.
  • Forgetting to reduce the cap for sideways relief already given as a non active or limited partner.
  • Assuming the cap replaces the general £50,000 or 25% limit, when both can apply.
  • Writing off losses that are restricted; they remain available against future profits of the same trade.

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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.