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Using Tax Losses When You’re Self-Employed

Making a tax loss in business is perfectly normal but if you are self-employed it can be worrying. Additionally, depending on your other forms of income, it could still mean you end up with a tax bill you can’t afford to pay! In this article, I’ve outlined four tax-efficient ways you can make use of your tax loss.

Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.

1. What is a Tax Loss?

A tax loss occurs when you fill in your tax return and your allowable expenses exceed your taxable income. This can happen for a number of reasons:

  • Sales being lower than usual because the market is bad or you’ve taken time off;
  • Claiming for the Annual Investment Allowance because you bought some expensive assets for your business;
  • Slow paying customers (only if you use the cash basis);
  • You took on new overheads and admin costs to help you grow your business, like sales and marketing.

2. Using Tax Losses When You’re Self-Employed

Here are four ways you can use your tax loss tax efficiently:

2.1 Carry Back Your Tax Loss

If you have been self-employed for more than one tax year, you can choose to carry back your tax loss one tax year and set it against any profits you made in your business, possibly generating a tax rebate.  To do this you’ll need to:

  • Make a claim in the self-employment section of your tax return;
  • Start with the most recent tax year and work your way back.

You cannot carry back any losses if you use the cash basis.

If you are newly self-employed then tax losses made in the first four years of trading can be carried back to the previous 3 years.

2.2 Claim a Tax Refund (Sideways Relief)

If you are employed and self-employed and your business made a loss, you may be able to get a tax refund of the tax you paid in your employment with your business loss.  This is called “Sideways Relief”.

You can also carry back your loss for up to 3 previous tax years. You can then use it against any previous employment tax you paid. You’ll need to start with the previous year and work your way back in time though.

You cannot use sideways relief if you use the cash basis.

Example 1

Lucy was employed for the tax year 2020/2021 and her P60 stated gross earnings of £30,000. She also started a side hustle and made a tax loss of £4,000 in the same tax year.  By filling in a tax return Lucy can elect to set her tax loss of £4,000 against her gross earnings, generating a tax repayment of the tax she has paid in her job.

Example 2

Emily was also employed and earned a gross salary of £10,000 in 2020/2021 so paid no tax on these earnings. Emily also started a side hustle and made a tax loss of £1,000 in the same tax year. 

Since Emily’s employment earnings are below her personal allowance, relieving the business loss against her employment earnings will not generate any refund. Therefore, there is no point doing a set-off. 

Emily will need to consider other ways of using her tax loss. For example, setting it against any capital gains or carrying her tax loss forward, (see below.)

If your self-employment losses are more than your other income, only elect to set off the same amount of your other income. Then carry forward the remaining amount of your tax loss to future tax years.

2.3 Set Your Tax Loss Against Capital Gains

If you have made a capital gain in the same tax year that you made a tax loss, you can choose to set your loss against your gain.  However, watch out, if you have employment income, you’ll need to set your tax loss against this FIRST. Then you can use any of the remaining loss against your capital gain.

You can also choose to carry back your loss for up to 3 previous tax years and use it against any capital gains you made. Again, you’ll need to start with the previous year and work your way back in time though.

2.4 Carry Forward Your Tax Loss

You can choose to carry forward some or all of your tax loss and use it against future profits you make in your business (not any other income though), reducing your tax bill in the coming years.  Make sure you keep a note of the tax losses you carry forward so you know exactly what you have available for use. 

Carry forward will happen automatically when you complete your tax return unless you elect to do something else with your tax loss.

Tax Losses & Class 4 National Insurance

3. How to Claim a Tax Loss

You’ll claim your tax loss relief when you fill in your tax return.

If you are self-employed, you can claim relief for trading losses you know you’ll make in the current tax year. You can then work out what your current liability would be if you claimed for your current tax year trading losses against this tax return.

You need to work out calculate the difference between your current tax calculation and what it should be if you could carry back the loss against it and enter that figure in this box.

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