Last updated: 14 October 2026
Can you set first-year losses against second-year profits?
Yes. A sole trader or partner can carry a trading loss forward and set it against future profits from the same trade, including second-year profits. But you may have better options. Losses in the first four tax years of a new business can be carried back against your total income from the three previous tax years, earliest first, which can trigger a tax refund on employment income you earned before starting. You can also set the loss against your other income in the same or previous tax year.
Loss relief options for sole traders
| Relief | How it works | Time limit for claim |
| Carry forward | Against future profits of the same trade | Must be claimed within 4 years |
| Sideways relief | Against total income of the loss year and/or previous year | By 31 January, 22 months after the loss year ends |
| Early years relief | Losses in first 4 tax years, set against total income of the previous 3 years, earliest first | As above |
| Terminal loss relief | Losses in the final 12 months, back against 3 previous years’ profits | 4 years |
Caps and restrictions
- Sideways and early years relief are capped at £50,000 or 25% of adjusted total income, whichever is higher, unless the loss comes from overlap relief
- Relief is only available if the business is run on a commercial basis with a view to profit
- Non-active traders (under 10 hours a week) have a £25,000 limit
- Losses calculated under the cash basis can now be relieved sideways, following changes from 2024/25
Example
Mark leaves his £45,000 job in 2025 and starts a landscaping business. He makes a £12,000 loss in 2025/26 because of equipment costs, and a £20,000 profit in 2026/27.
- Carry forward: sets £12,000 against the 2026/27 profit, saving 20% tax and 6% Class 4 NIC: £3,120
- Early years relief: carries the loss back to 2022/23, when he paid 20% tax on his salary, giving a refund of £2,400 straight away
Carry forward saves more in total because it also cuts Class 4 NIC, but early years relief gives cash sooner. If Mark had been a higher-rate taxpayer in 2022/23, early years relief at 40% would have been worth £4,800.
Class 4 NIC
Losses relieved against other income don’t reduce Class 4 NIC. Any loss not used for income tax can still be carried forward for Class 4 NIC against future trading profits.
Companies
Company losses work differently: they can be set against other profits of the same period, carried back 12 months, or carried forward.
Records to keep
Keep your accounts for each year, the loss calculations and copies of any claims. If you carry a loss back, HMRC will repay tax for the earlier year, so keep the P60 or tax calculation for that year too.
Frequently asked questions
Do I have to use the loss in year two?
No, choose the most valuable option.
Can I split a loss between reliefs?
Yes, but each claim uses the loss in a set order.
Can I claim a refund before filing?
Yes, by making a standalone claim, but usually it’s done on the return.
What counts as commercial?
A business run with the aim of making profits within a reasonable time.
Related: using losses in the same tax year, loss carry back across two trades and offsetting share losses.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with loss relief for new businesses. 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.
