Red Ink, Real Relief: Making Trading Losses Work in 2026/27

A trading loss is rarely just a negative figure at the bottom of a profit and loss account. For tax purposes, it is a calculated amount with conditions attached. Before deciding whether to carry a loss forward, set it against other income or look back to earlier profits, a business needs to establish what kind of loss it has, how much of it is available and which relief fits the commercial reality of the year.

For 2026/27, the rules have not changed in any dramatic way, but the practical points still catch people out. Relief is not automatic in every case, claims have time limits and the evidence behind the loss figure matters as much as the figure itself.

Start with the computation, not the claim

The first step is to separate an accounting loss from a tax loss. A sole trader may show a loss in the accounts and still have a different loss for tax after adjustments for private use, disallowable expenditure, capital allowances and other tax-specific rules. A company may have an accounting loss that differs from its corporation tax trading loss for similar reasons.

It also helps to confirm that the loss arises from trading. A loss on selling a property, disposing of an investment or writing off a loan may be a capital loss or another category entirely. Capital losses do not generally sit within trading loss relief. Mixing the two is one of the most common reasons a claim runs into difficulty.

The trade should also be commercial. HMRC expects a genuine intention to make a profit, supported by business records and a sensible explanation of how losses will be addressed. A loss year in itself is not a problem, but a pattern of losses without a credible plan invites questions.

Sole traders: matching the loss to the right route

For an unincorporated business, there are several possible ways to use a trading loss. The right one depends on the year, the trade and the taxpayer’s other income.

The first is carry-forward. A trading loss can generally be carried forward and set against future profits of the same trade. This is often the simplest option where the business expects to return to profit and the owner has no need to reduce income tax in the current or previous year.

The second is sideway relief. Subject to conditions and the cap on relief, a trading loss can be set against total income of the same tax year or the previous tax year. This can be valuable where the sole trader has other income, such as employment income or rental profits. The cap means the relief is not unlimited, so the calculation should be done before assuming a full offset.

The third is early trade relief. A loss in the early years of a new trade may be carried back against total income of earlier tax years, subject to the detailed rules. This is a specialist area and the order of relief matters.

The fourth is terminal loss relief. When a sole trader ceases to trade, a loss in the final period may be carried back against trading profits of earlier years, after the final year has been dealt with. The rules are specific about the final period and the years available, so this is not a claim to estimate from memory.

For individuals, claims generally need to be made within four years from the end of the tax year in which the loss arises. The 2026/27 return itself is due by 31 January 2028, but a claim or amendment may have a longer window. The practical lesson is not to leave a loss sitting unexplained in the accounts.

Companies: same period, look-back and carry-forward

A limited company has its own loss framework. A trading loss can usually be set against total profits of the same accounting period. It may also be carried back against total profits of the preceding 12 months, subject to the rules and claims. Any unused loss can generally be carried forward against future profits of the same trade, with additional flexibility in some circumstances.

Company claims are generally subject to a two-year time limit from the end of the accounting period in which the loss arises. That is shorter than the individual timetable and easy to miss when accounts are filed late or the loss is not reviewed until the following year.

A company should also keep a loss memorandum. This is a simple schedule showing how the loss arose, how much has been used, what remains and which accounting period it belongs to. Without it, a carry-forward claim becomes harder to support several years later.

Terminal losses need a final-year review

A cessation is not just an administrative event. For a sole trader, the final period can produce a terminal loss that is carried back against earlier trading profits. The calculation depends on the final 12 months of trading and the interaction with the final year’s profits.

Directors closing a company should take separate advice. The corporate rules do not mirror the sole trader terminal loss rules, and the order in which losses are used on a cessation can affect the final corporation tax position.

Common traps and the evidence to keep

Most failed loss claims are not caused by bad faith. They fail because the loss was not properly identified or the claim was made in the wrong way.

Watch for capital expenditure being treated as trading expenditure, private costs being included without adjustment, and losses from one trade being mixed with another. Keep the accounts, tax computations, loss schedules and correspondence together. If sideway relief is claimed, retain the calculation showing the cap and the income against which the loss is set. If a carry-back is claimed, keep the revised computations for the earlier year.

A loss year can still fit into a sensible tax plan. It may be better to preserve a loss for future profits than to use it at a lower rate of relief, and cash flow may matter more than the headline tax saving. The key is to make the choice deliberately, document it and review it before the claim deadline passes.