How do trading losses work for sole traders?

A trading loss is when your business costs exceed its income for the tax year. For 2026-27 you can set it against other income this year or last, carry it forward, or in some cases carry it back further.

A quiet winter, a new van or a slow first year can all leave more going out than coming in. The rules below follow HMRC's losses helpsheet (HS227) and Business Income Manual as checked on 17 October 2026.

The four ways to use a loss

"Other income" means your total income for that year, such as wages from a job, not just your trade. Between the year of the loss and the year before, you choose which comes first, but each pound of loss is only used once.

The law sets the first two deadlines at one year after the 31 January filing date for the tax year of the loss. For a 2026-27 loss, that is 31 January 2029.

The rules that catch people out

• No part claims. If you set a loss against a year's income, it must use as much of that income as possible, even if that means your personal allowance goes to waste. Only the balance left over can be carried back, forward or used another way.
• A yearly limit on relief. Loss relief against other income counts towards a limit of £50,000 or 25% of your adjusted total income, whichever is higher. HMRC's example: Phil has £70,000 of total income and a £60,000 trading loss, so £50,000 is set against his income and the other £10,000 is carried forward. The limit does not apply to losses set against profits of the same trade.
• It must be a real business. You cannot claim against other income if the trade is not run commercially or with a view to profit, for example if it is really a hobby.
• Part-time trades. If you spend on average less than 10 hours a week personally working in the trade, relief against other income for that year's loss is capped at £25,000.
• The trading allowance. If you take the £1,000 trading allowance instead of your expenses, you cannot claim a loss against other income on the self-employment pages.

Losses under the cash basis

The cash basis has been the default for sole traders since 2024-25. Before then, a cash basis loss could only be carried forward against later profits of the same trade, or used when the business stopped. The government removed that restriction from 2024-25, so cash basis losses can now be set against other income of the same year or carried back, under the same rules as traditional accounting. HMRC's manual confirms the old restriction covers only losses from 2013-14 to 2023-24.

Worked example

A self-employed roofer has a slow 2026-27 and buys a new van. On the cash basis, the van is a business expense, and the year shows a £6,000 loss. The roofer also has £9,000 of wages from a part-time job that year, and made a profit of £32,000 in 2025-26.

• Option 1: set the £6,000 against the 2026-27 wages. Because part claims are not allowed, the whole £6,000 is used against them. The £9,000 is already below the £12,570 personal allowance, so this saves no tax.
• Option 2: set it against 2025-26 income instead, the year before the loss, when the roofer's income was much higher.
• Option 3: carry it forward against the roofing profits of 2027-28 onwards.

Which suits depends on the figures for each year. This is an example only.

What this means for you

A loss can usually be put to use. For a trade that has been going a while, the usual choice is between setting it against other income such as wages, using it against last year's income, or carrying it forward. If you are in your first 4 tax years of trading, the 3-year carry back may be worth a look, especially if you were employed before.

The loss for tax is worked out the same way as a profit, so keep the records behind it, including any van, tools or equipment bought during the year.

Steps to claim a trading loss

1. Work out your profit or loss for the tax year, including your expenses and any capital allowances. A loss shows as a net business loss for tax purposes (box 32 on the 2025-26 short self-employment pages).
2. Decide how to use it, using the table above, and check the yearly limit and the no part claims rule.
3. On those pages, put a loss set against other income of the same year in box 33, a loss carried back (including early years and terminal loss claims) in box 34, and the amount to carry forward in box 35.
4. If you carry a loss back, give the amount used for each year in the "Any other information" box, and enter the drop in tax for the earlier year where the return asks for it.
5. In later years, set the carried-forward loss against profits of the same trade (box 29).
6. Diary the deadline for your claim, and keep a working note of the loss and how much has been used.

If you are in Making Tax Digital (MTD), the rules do not change: you report losses through your compatible software when you complete your tax return. The free MTD check shows when MTD starts for you, and the trades section has more guides on running a trade.