Using Tax Losses When You’re Self-Employed

Making a loss in business is perfectly normal but if you are self-employed it can be worrying and, depending on your other forms of income, still mean you end up with a tax bill you can’t afford to pay. If your business has made a loss, then here’s what you can do with it.

What is a Tax Loss

A tax loss occurs when you log on your tax return a scenario where 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 out;
  • 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.

Using Tax Losses When You’re Self-Employed

There are three ways you can use a tax loss in the tax year that you make it.

1. Carry Back Your Tax Loss

If you have been self-employed for more than one year you can choose to carry back your tax loss one year and set it against any profits you made in your business, possibly generating a tax repayment. 

You’ll have to

  • Claim this on your tax return in the self-employment section;
  • Start with the most recent tax year and work your way back.

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.

Important. You cannot carry back any losses if you use the cash basis for self-employment earnings

2. If You Are Employed and Self-Employed and Want to Claim a Tax Refund

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 and 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.

Note: You cannot use this method of relieving tax losses if you use the cash basis

Examples of Claiming Sideways Relief When You’re Employed and Self-Employed

Example 1

Lucy was employed for the tax year 2017/2018 and her P60 should gross earnings of £30,000.

She also started a side business and made a tax loss of £4,000 in the same tax year. 

By completing a tax return Lucy can elect to set her business 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 2017/2018, so paid no tax on these earnings. 

Emily also started a small side business 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 so there is no point doing a set-off. 

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

Tax Tip – 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.

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 Tax Loss against this gain. 

Watch out, if you have employment income you’ll need to set your tax loss against this FIRST, then 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. You’ll need to start with the previous year and work your way back in time though.

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. 

This 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

How to Claim a Tax Loss

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

adjustments to tax due
Claiming a Tax Loss

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.

Updated 5 November 2020

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.