If your self employed business makes a trading loss, section 64 of the Income Tax Act 2007 lets you deduct it from your total income of the tax year of the loss, the previous tax year, or both. The claim must be made by the first anniversary of the normal Self Assessment filing date for the loss year, the trade must be run commercially with a view to profit, and the deduction counts towards the cap of £50,000 or 25% of adjusted total income.

What does setting a loss against other income actually mean?

Section 64 of the Income Tax Act 2007 (ITA 2007) lets a person who carries on a trade and makes a loss in a tax year deduct that loss in calculating their net income, so it can reduce tax on salary, pension, rental profits, interest and dividends as well as trading profits. The legislation calls this trade loss relief against general income, and section 60(4) groups it with early trade losses relief under the label “sideways relief”.

The relief applies to professions and vocations as it does to trades (section 64(7)). Partners can claim it too: HMRC’s helpsheet HS227 explains that your share of a partnership loss is treated as arising from a trade you carry on alone. HMRC’s Business Income Manual at BIM85005 confirms that a loss is calculated on the same basis as a profit, so the figure you claim is the tax adjusted loss for the year, including capital allowances. Before relying on any of this, be sure the activity is a trade at all; see the badges of trade.

Which tax years can the loss be set against?

Under section 64(2) the claim can be for the loss year, the previous tax year, or both. If you claim for both years you must say which year is relieved first (section 64(3)), and section 65 then deducts the loss from that year’s net income, with any balance going to the other year. If a loss is still left after that, it can be used in any other relief in the same Chapter, most commonly carry forward against later profits of the same trade.

There is a priority rule where losses of two years compete for the same year’s income. If you claim a loss against income of its own year and also carry back a loss of the following year to that same year, section 65(2) and (3) give priority to the first claim. HMRC’s example at BIM85015 shows the effect: the earlier year’s loss must be used first.

If your income is not enough to absorb the loss, section 261B of the Taxation of Chargeable Gains Act 1992 lets you treat the unused part as an allowable capital loss of the same year. Section 261C limits this to the gains you would otherwise be charged on, ignoring the annual exempt amount, and the claim has the same deadline as the section 64 claim.

BIM85010 notes that section 64 relief is not available for cash basis losses of 2013 to 2014 through 2023 to 2024. Finance Act 2024 removed that restriction (former section 74E) from 2024 to 2025 onwards. See cash basis versus accruals accounting.

Can I choose how much of the loss to use?

No. HMRC’s guidance at BIM85080, relying on the case of Butt v Haxby, states that partial claims are not permitted. Once you claim for a year, the loss is set against as much of that year’s income as it can cover, even if that means wasting your personal allowance. You cannot, for example, relieve just enough to bring income down to the personal allowance and save the rest.

The choice you do have is which year to target and whether to claim at all. Section 25(3A) also fixes the order within a year: the deduction comes off income other than property, savings and dividend income first, before those categories.

What is the deadline for the claim?

Section 64(5) requires the claim to be made on or before the first anniversary of the normal Self Assessment filing date for the loss making year. HMRC’s table at BIM85075 describes this as within 12 months of 31 January following the year of the loss. In practice:

  • a loss for 2025 to 2026 must be claimed by 31 January 2028
  • a loss for 2026 to 2027 must be claimed by 31 January 2029

A claim to set the loss against income of the same year should be made in the tax return where possible. A carry back claim to the previous year does not have to be in a return: BIM85070 explains that it can be a stand alone claim, and HMRC accepts it may be made before the return for the loss year is filed. When you carry a loss back, HS227 asks you to show the amount used and the resulting decrease in tax for the earlier year; the tax saving is worked out using the earlier year’s figures. Do not wait for final accounts: BIM85005 says HMRC accepts a best estimate claim followed by the final figure.

When will HMRC refuse relief?

Several restrictions in ITA 2007 can deny or limit the claim:

  • Commercial basis. Section 66 denies relief unless the trade is carried on throughout the tax year on a commercial basis and with a view to the realisation of profits. A trade carried on so as to afford a reasonable expectation of profit meets the second part (section 66(3)). If the way the trade is run changes during the year, it is judged on how it is run by the end of the year (section 66(5)). HMRC’s guidance at BIM85705 quotes Wannell v Rothwell on the distinction between a serious trader and “the amateur or dilettante”.
  • Hobby farming. Section 67 denies relief for a farming or market gardening loss if a loss, before capital allowances, was made in each of the previous five tax years, subject to exceptions.
  • Tax generated losses. Section 74ZA denies sideways relief for losses connected with arrangements whose main purpose, or one of whose main purposes, is to obtain a tax reduction through sideways relief.
  • Non active traders. Section 74A caps sideways relief at £25,000 a year where a sole trader spends less than an average of 10 hours a week in the trade. See loss restrictions for non active traders.
  • Overseas trades. BIM85010 notes that losses of a trade carried on wholly outside the UK by a UK resident are relievable only against qualifying foreign income (section 95).

How does the £50,000 cap affect the claim?

Section 24A ITA 2007 limits a group of reliefs, including section 64 and section 72, to the greater of £50,000 and 25% of your adjusted total income for the year. HS227 repeats this limit, and BIM85701 says the cap is applied after the other restrictions. The cap does not apply to the extent that a loss is set against profits of the same trade, so a sole trader whose loss is partly absorbed by earlier profits of the same business is not restricted on that part. The detail is in our guide to the cap on unlimited income tax reliefs. A loss held back by the cap can still be carried forward against future profits of the trade.

A worked example

Illustration only. Priya has run a design business for several years. For 2025 to 2026 the business makes a tax adjusted loss of £30,000. She also has part time employment income of £18,000 in 2025 to 2026, and had total income of £40,000 in 2024 to 2025.

Option Effect
Claim 2025 to 2026 first, then 2024 to 2025 £18,000 used in 2025 to 2026, wasting her personal allowance; £12,000 carried back to 2024 to 2025
Claim 2024 to 2025 only £30,000 set against her £40,000 income for 2024 to 2025; her 2025 to 2026 personal allowance is preserved
Make no sideways claim £30,000 carried forward against future profits of the design business

The loss is below £50,000, so the cap does not bite. The second option will often give the best result here, but the right answer depends on the rates of tax each year and on whether profits are expected soon. Either sideways claim must be made by 31 January 2028.

Does the claim also reduce Class 4 National Insurance?

Not automatically. HMRC’s National Insurance Manual at NIM24610 explains that trading losses are relieved for Class 4 in the same way as for income tax under sections 64, 72, 83 and 89. But where a loss is used against income that does not attract Class 4, such as employment income, no Class 4 relief has been given for that part. That part can be carried forward against future Class 4 profits of the trade, so your Class 4 loss record can differ from your income tax loss record. For the wider rules see National Insurance for the self employed.

What mistakes come up most often?

  • Missing the deadline because accounts are late.
  • Trying to make a partial claim to protect the personal allowance.
  • Forgetting the priority rule when losses of two consecutive years are both carried to the same year.
  • Claiming for an activity that HMRC regards as a hobby or not run commercially.
  • Ignoring the £50,000 or 25% cap when other capped reliefs, such as qualifying loan interest, are also claimed.
  • Overlooking the alternatives. New businesses may do better with early years trade loss relief, and some losses are worth more carried forward.

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Sources

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.