Making a trading loss whilst not ideal can sometimes generate a tax refund. If you are a self-employed individual or a member of a trading partnerships, a trading loss can potentially be set against other income or capital gains. This can reduce the amount of tax payable and, where tax has already been paid, may result in a refund.
For the 2025-26 tax year that ended in April, a loss can generally be set against income for the same year or the previous tax year. This means a business that made a profit in an earlier year but has subsequently made a loss may be able to recover some of the tax previously paid.
There are restrictions. For example, the trade must generally be carried on commercially and for profit, rather than as a hobby. Other restrictions can apply depending on the circumstances, including where the individual works fewer than 10 hours a week on the commercial activities of the trade.
There is also a limit on the amount of certain Income Tax reliefs that can be claimed against total income. The limit is generally the higher of £50,000 or 25% of adjusted total income.
A loss can also usually be carried forward and used against future profits from the same trade.
If you have a trading loss, it may provide an opportunity to reduce an earlier tax bill, generate a refund or reduce tax on future profits. The rules can be complex, and we are happy to help advice you on the best way forward.
