A partnership’s tax loss is divided between the partners using the profit sharing arrangements for the period, with a statutory rule that stops any partner being allocated a profit out of a loss. Each partner then chooses independently how to use their own share: against their other income of the same or previous year, against capital gains, against earlier years if they recently joined, carried forward against later profits of the same trade, or carried back on leaving. Limited partners, LLP members and partners who work less than ten hours a week face extra caps.

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How is a partnership loss worked out and shared?

Under section 849 of the Income Tax (Trading and Other Income) Act 2005 the firm’s profit or loss is calculated as if the firm were a UK resident individual, and losses of other periods are ignored in that calculation. Section 850 then shares the result according to the firm’s profit sharing arrangements for the period. If there are prior shares such as partners’ salaries or interest on capital, these are allocated first and the balance is split in the residual ratio, exactly as for a profit. The mechanics are explained in how partnership profits are shared for tax.

Section 850B deals with the awkward case where the arrangements would give one partner a profit and others a loss in a loss making year. The partner with the notional profit is given nil, and the actual loss is shared among the loss making partners in proportion to their notional losses.

Illustration only. A firm makes a tax loss of £10,000. Amira is entitled to a salary of £12,000 and the balance is shared equally between Amira, Ben and Cara. After the salary there is a loss of £22,000 to split, so each has a notional loss of £7,333 and Amira’s overall result is a profit of £4,667. Section 850B gives Amira nil and splits the real £10,000 loss between Ben and Cara in proportion to their notional losses: £5,000 each.

Do all the partners have to claim relief the same way?

No. HMRC’s Partnership Manual (PM191300) says claims that affect only an individual partner’s liability must be made by that partner, each claim is considered independently, and each partner is responsible for claiming the relief that suits their own circumstances. One partner can use their share against a salary from another job while a colleague carries theirs forward. The claims are made on each partner’s own return, in boxes 21 to 24 of the Partnership pages (SA104).

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Which reliefs can a partner claim?

Relief What it does Legislation
Against general income Deducted from total income of the loss year, the previous year, or both ITA 2007 s64
Against capital gains Loss not used against income set against gains of a year for which a section 64 claim is available TCGA 1992 s261B
Early trade losses Loss in the first tax year a person carries on the trade or the next three, carried back to the three previous years ITA 2007 s72
Carry forward Set only against later profits of the same trade ITA 2007 s83
Terminal loss Loss of the final 12 months set against profits of the same trade in the final year and three previous years ITA 2007 s89

Claims under sections 64 and 72 must be made by the first anniversary of the normal filing date for the loss year, so a 2026 to 2027 loss needs a claim by 31 January 2029. Relief against general income is only available if the trade is carried on commercially with a view to profit (section 66). The detail of the general income claim is in using a trading loss against other income.

How does a new partner use early years relief?

Section 72 looks at when the individual first carries on the trade, not when the firm started. A partner who joins an established firm and has a loss share in their first tax year as a partner, or the next three, can carry it back against their income of the three earlier tax years, earliest first, which often means recovering PAYE paid as an employee. The SA104 notes for 2025 to 2026 describe the same relief as starting with the earliest year. Details are in early trade losses relief.

What happens to a loss when a partner leaves?

PM209000 explains that a partner who leaves a continuing firm can claim terminal loss relief under section 89 on their share of the trade loss, while the remaining partners keep their shares to set against general income or carry forward against their future shares of profit. A leaver cannot take an unused carried forward loss into a new business, because section 83 relief is only against profits of the same trade. See terminal loss relief.

What extra limits apply to limited partners, LLP members and non active partners?

Relief against other income and gains, which HMRC calls sideways relief, is restricted for three groups. PM191000 defines a non active partner as one who does not spend, on average, at least ten hours a week personally engaged in the trade.

  • Limited partners (PM194000): total sideways relief can never exceed the partner’s capital contribution at the end of the basis period for the loss year, after deducting withdrawn capital.
  • LLP members (PM196000): the same contribution limit applies to all members, with the contribution including the member’s liability on a winding up; for non active members only amounts actually contributed on a winding up count.
  • Non active general partners (PM199000): the contribution limit applies to losses in early tax years, meaning the tax year the individual started and the next three.

On top of these, section 103C of ITA 2007 caps sideways relief at £25,000 a year for limited partners and non active partners, including non active LLP members. The cap does not stop relief against profits of the same trade. PM191000 adds that HMRC regards these partnership restrictions as not applying to professions or vocations, and that taxpayers must limit their own claims. Capital put in mainly to obtain loss relief does not count towards the contribution. The wider rules on part time traders are in loss relief restrictions for non active traders.

Is there an overall cap on loss relief?

Yes. Section 24A of ITA 2007 limits certain reliefs deducted from total income, including sections 64 and 72, to the greater of £50,000 or 25% of adjusted total income. The cap does not apply to the part of a claim set against profits of the same trade. A partner with a large loss share and modest other income may therefore get only part of the relief now, with the rest carried forward.

A worked example of three different choices

Illustration only. A three partner firm has a 2026 to 2027 tax loss of £45,000 shared equally, so each partner has £15,000. Dan has a salary of £75,000 from a part time employment and claims under section 64 against his 2026 to 2027 income, saving tax at 40% on the whole £15,000. Esther has little other income in either year, so she carries her share forward under section 83 to use against her share of future profits. Femi joined the firm in 2026 to 2027 after years as an employee, so he claims under section 72 to set his share against his employment income from 2023 to 2024 first. The three claims sit on three separate returns and none depends on the others.

What mistakes come up most often?

  • Allocating a loss in a way that gives one partner a profit, ignoring section 850B.
  • Assuming the firm makes one claim for everyone, when each partner must claim on their own return.
  • Missing the first anniversary deadline for a section 64 or section 72 claim.
  • Claiming sideways relief as a limited partner or LLP member beyond the capital actually at risk.
  • Ignoring the £25,000 cap for a partner who works fewer than ten hours a week.
  • Forgetting that a carried forward loss only reduces later profits of the same trade.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.