Last updated: 14 October 2026
Can you deduct losses from your sole trader business in the same tax year?
Yes. If your sole trader business makes a loss, you can usually set it against your other income in the same tax year, the previous tax year, or both, using sideways loss relief. That can reduce tax on your employment, pension or rental income, and may give you a refund. Alternatively, you can carry the loss forward against future profits from the same trade. Relief against other income is capped at the higher of £50,000 or 25% of your adjusted total income.
Your options for a trading loss
| Option | How it works |
| Sideways relief, same year | Set against total income of the loss year |
| Sideways relief, previous year | Set against total income of the year before |
| Carry forward | Against future profits of the same trade, with no time limit |
| Early years relief | Losses in the first 4 tax years can be carried back against income of the previous 3 years, earliest first |
| Terminal loss relief | Losses in the final 12 months can be carried back 3 years |
| Against capital gains | Unused losses can be set against gains in the same year |
Conditions
- The business must be run on a commercial basis, with a view to profit
- Non-active traders (working under 10 hours a week) face a £25,000 limit
- Losses can’t be set against other income if the business is a hobby or uncommercial for more than 5 years
- Since 2024/25, losses under the cash basis can also be relieved sideways
Example
Leila works part-time with a salary of £30,000 and starts a photography business in 2026/27. In the first year, she buys equipment and makes a £6,000 loss. She claims sideways relief against her salary, reducing her taxable income to £24,000. Her tax falls by £1,200, which HMRC refunds after she files her return. Under early years relief, she could alternatively carry the loss back against income in the 3 previous years.
How to claim
Claim on your Self Assessment return, in the trading loss section, for the year you want to use it. Claims must be made within 1 year of 31 January after the end of the loss year for sideways relief.
Choosing the best year
Use the loss in the year where your marginal rate is highest. A loss set against income taxed at 40% is worth twice as much as one at 20%. You can’t choose how much to use: a sideways claim uses as much of the loss as the income allows, even if that wastes your Personal Allowance.
Losses in a partnership
If you trade in a partnership, each partner can claim their share of the loss in the same ways, against their own income. The same caps and commercial tests apply to each partner individually.
Frequently asked questions
Can I offset losses against my partner’s income?
No, only against your own.
Does a loss reduce National Insurance?
Class 4 losses can be carried forward against future profits only.
What if I make losses every year?
HMRC may say the business isn’t commercial.
Can a company use a sole trader loss?
Losses don’t pass to the company, but if you transfer the business for shares, unused losses can be set against your income from the company, such as salary and dividends.
Related: working out taxable profits and AIA for sole traders.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with using business losses. See our sole trader accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
