Your biggest client goes in-house. You spend three months rebuilding a pipeline, put real money into a rebrand and a new site, and the year closes with expenses of £46,000 against fees of £28,000. An £18,000 loss.

That loss is an asset. It is not a large one, and it will never feel like compensation for the year you have had, but it is worth somewhere between roughly £1,500 and £7,000 of real cash depending purely on which relief you claim and when. The self-employed people who get the smaller number are almost never the ones who did nothing. They are the ones who reached for the obvious claim, got a repayment quickly, and never found out what the loss could have done.

Five routes, and they are not interchangeable

  • Against your general income, this year. Set the trade loss against everything else you were taxed on in the same tax year — employment income, rental profits, savings interest, dividends.
  • Against your general income, last year. The same claim, carried back one tax year. This is the one that produces a repayment of tax you have already paid, which is why it is the one most people take.
  • Early trade losses relief. A loss in any of the first four tax years of a trade can be carried back three years, set against the earliest year first. Often the most valuable relief available to someone who left a salaried job to go out on their own, because the years being relieved contain a full-time salary.
  • Carry forward. Set against future profits of the same trade, indefinitely, until it is used up. Slower, and frequently worth more.
  • Terminal loss relief. If the trade is ending, the loss of the final twelve months can be carried back three years.

Where a loss exceeds all your income, there is a further extension into capital gains of the same or previous year, which matters if you have sold a property or a shareholding in the loss year.

The cap that catches larger losses

Relief against general income — sideways or carried back — is capped at the higher of £50,000 and 25% of your adjusted total income for the year being relieved. Below £50,000 of loss the cap is irrelevant, which covers most freelance and consulting losses. Above it, the excess is not lost: it drops into carry forward against future profits of the same trade.

The cap does not apply to carry forward, and it does not apply where the loss is set against profits of the same trade.

One thing that changed and made this simpler

Until 2023/24, a loss worked out on the cash basis was locked out of sideways relief and carry back — carry forward was the only option. That restriction was removed for losses arising in 2024/25 and later. Since the cash basis is now the default for the self-employed, this matters to almost everyone reading: whichever basis your accounts are on, the same five routes are open to you.

The claim is all or nothing, and that is where the money is lost

A claim against general income must absorb the whole loss, or the whole of that year's income, whichever is smaller. You cannot restrict it to leave your personal allowance intact. There is no partial claim.

That single rule is why the two worked examples below, using the same £18,000 loss and the same claim, produce answers three times apart.

Worked example: when carrying back wins

Illustrative figures, 2026/27 rates throughout. A freelance consultant makes an £18,000 loss. Last year the same business made £58,000 of profit.

Last year as filed. Profit £58,000, personal allowance £12,570, so £45,430 taxable. £37,700 at 20% = £7,540, and £7,730 at 40% = £3,092. Income tax £10,632.

Last year with the loss carried back. Profit becomes £40,000, so £27,430 taxable at 20% = £5,486.

Repayment: £5,146. The loss stripped out the whole of the 40% band first, so £7,730 of it relieved tax at 40p in the pound.

The repayment lands within weeks of the return being filed rather than in a future January, and the loss keeps working afterwards — see the Class 4 point below.

Worked example: when carrying back destroys the loss

Same £18,000 loss, same consultant, one change: last year's profit was £20,000 rather than £58,000.

The same £18,000 loss carried back against a £20,000 year, compared with carrying it forward against a £45,000 year One £18,000 loss. Two claims. £3,194 between them. Illustrative, 2026/27 rates. Prior year profit £20,000; following year profit £45,000. Carried back one year Income it is set against £20,000 Covered by personal allowance £12,570 Loss that actually relieved tax £7,430 Loss burnt with no relief £10,570 Tax saved £1,486 Carried forward Profits it is set against £45,000 Income tax relieved at 20% £3,600 Class 4 NIC relieved at 6% £1,080 Loss burnt with no relief £0 Tax saved £4,680 The claim you cannot make partially is the one that wastes £10,570 against an allowance you already had.

Carry the loss back and it is set against £20,000 of income, £12,570 of which was already covered by the personal allowance. Only £7,430 of the loss relieves anything, saving £1,486 of income tax. The other £10,570 is gone, and because the claim is all or nothing you cannot hold it back.

Do nothing instead, and the whole £18,000 carries forward. Against a following year at £45,000 of profit it relieves income tax at 20% and Class 4 National Insurance at 6% — a combined 26% — worth £4,680. Waiting eighteen months is worth £3,194 more than the quick repayment.

The decision rule

Before choosing, work out for each candidate year what rate the loss would actually relieve at:

  1. 40% or 45% — income above £50,270, or the £100,000 to £125,140 band where the personal allowance tapers and the effective rate is 60%. Claim against that year first, every time.
  2. 26% — trade profits in the basic rate band, where the loss saves income tax at 20% and Class 4 at 6%.
  3. 20% — non-trading income in the basic rate band, such as a salary or rental profit. No Class 4 saving.
  4. 0% — anything covered by the personal allowance. A loss set here is destroyed.

Then look at how much of the loss would land in each of those tiers. The right claim is nearly always the one that keeps the smallest amount of loss in the bottom tier, and the timing question only matters once two options are close.

Class 4 National Insurance runs on its own track

This is the part that gets missed, including by software left to its own devices. For Class 4 purposes a trade loss can only ever be set against profits of the same trade, in the same year or a later one. There is no carry back and no relief against employment income, rent or interest.

The consequence is useful. Claim a loss against your general income and you have relieved it for income tax, but for Class 4 the same loss is still sitting there, available against future profits of that trade. In the first worked example above, the £18,000 carried back saved £5,146 of income tax and remains available to reduce Class 4 NIC on future profits, worth up to a further £1,080 at 6%.

It only happens if somebody keeps the second figure. Two running totals have to be maintained — losses carried forward for income tax, and losses carried forward for Class 4 — and they will not match. If nobody is tracking the Class 4 column, that relief quietly evaporates.

The commerciality test

Relief against general income is only available where the trade is carried on commercially and with a view to profit. A consultancy having a bad year passes this without argument. A long-standing side activity that has produced losses every year and never looked like making money does not, and HMRC challenges those claims on exactly that ground.

The practical test is whether an outsider looking at your pricing, your marketing and your decisions would conclude you were trying to make money. Keep the evidence: quotes issued, pitches made, the reason the costs were incurred. Our post on side hustle tax and the trading allowance covers where the line between a trade and a hobby actually sits.

The deadlines

  • Against general income, this year or last: by 31 January 2029 for a 2026/27 loss — one year after the filing deadline for the loss year.
  • Early trade losses relief: the same deadline.
  • Carry forward: notify HMRC within four years of the end of the tax year, so 5 April 2031 for 2026/27. Carry forward is not automatic. A loss never reported is a loss you cannot use.
  • Terminal loss relief: within four years of the end of the tax year in which the trade ceased.

Carrying back also disturbs the year you are relieving, which usually means payments on account for the current year need revisiting at the same time. Our self-employed tax calendar has every date that follows from a loss claim, and if the loss year is also a cashflow year, our post on managing irregular income is the other half of the problem.

What to do this week

  1. Finish the accounts. You cannot choose between claims without knowing the loss to the pound, and a half-finished set of books usually understates it — the costs of a bad year are the ones least likely to have been captured.
  2. Write down your total income for the loss year, the previous year, and if you are within four years of starting, the three years before that.
  3. Mark against each the rate the loss would relieve at, using the four tiers above.
  4. Check how much of the loss would fall inside a personal allowance in each scenario. That number is the cost of the claim.
  5. Decide, and make the claim on the return rather than in a letter. Then record the Class 4 loss carried forward separately.
  6. If you are in the first four tax years of trading and gave up a salary to start, price the three-year carry back before anything else. It is usually the winner and it is the one most often missed.

Where we help

We work out what each claim is worth in cash and in timing before anything is filed, make the claim, chase the repayment, and keep the separate Class 4 loss memorandum so the National Insurance relief is still there in later years. If the loss year has put a payment on account out of step, we deal with that at the same time. Fixed fees from £19 + VAT a month. Get started.