The effect is that you reduce your taxable income for the year the loss arose (or even for the prior year) by the amount of the loss, subject to limits.

Key features for 2025/26:

• For losses arising in the tax year 2024/25 or later, it no longer matters whether you use the cash basis or accruals basis of accounting for the loss claim.

• There is a cap on the amount you can relieve against general income: generally the greater of £50,000 or 25 % of your adjusted total income.

• If you have other income (for example salaried income, rental income or investment income), you must consider the effect of using up your personal allowance or impacting your marginal tax rate before you make the claim.

• You must use the entire loss or as much as possible; you cannot do a partial claim to preserve allowances.

This option is often used if you have significant income in the year of the loss (or immediately prior year) which you can reduce by the loss.

Relief Option 2: Carrying forward trading losses to future profits

(2 of 3 main relief pathways)

If you cannot (or it doesn’t make sense to) claim your loss against general income, you can carry the trading loss forward to offset future profits of the same trade.

In effect, you wait until the business returns to profit and then use past years’ losses to reduce the tax charge in that profitable year. GOV.UK+1

Key notes for 2025/26:

• Losses brought forward can be carried into later years without the same cap as sideways relief (because they’re being used against the same trade).

• You must use the loss against the first year in which the trade makes a profit — you cannot tailor which year gets the claim to preserve allowances.

• If you previously made a loss and did not claim sideways relief you still retain the ability to carry it forward (subject to time limits).

This option is particularly suitable when you expect your trade to return to profit in future years and you want to retain flexibility.

Relief Option 3: Special reliefs for trading losses (early-trade & terminal loss)

(3 of 3 main relief pathways)

There are two important special reliefs for trading losses: early-trade loss relief and terminal loss relief.

Early-trade loss relief

If your trade is new, you may be able to carry back a trading loss made in the first four years of the trade to offset income of the three years before the loss year. This may provide a quicker cash-flow benefit.

Key for 2025/26:

• The business must have started after 5 April 2020 (for the relief to apply in these new rules) in many cases.

• For losses arising in 2024/25 onwards, the accounting basis need not be accruals – cash basis is acceptable.

Terminal loss relief

If your trade ceases, a trading loss made in the final 12 months of trading may be relieved against profits of the same trade in the four years prior to cessation.

Key for 2025/26:

• The trade must have ended in the tax year in which the loss arises.

• You must inform HMRC that the loss is a terminal loss relief claim.

The existence of these special reliefs means that if your business is at either a “start-up loss” phase or a “closing down loss” phase, you may have additional options beyond the standard carry-forward or sideways relief.

How the 2025/26 updates affect trading losses

Here are some of the most important updated rule changes you should be aware of when considering trading losses in the 2025/26 tax year:

• The reform to basis periods for sole traders and partnerships now means that profits (and losses) may need to be apportioned across tax years if your accounting period does not align with the tax year.

• Losses arising in tax years from 2024/25 onward can claim sideways relief regardless of whether they arise under cash basis or accruals basis.

• The usual cap on relief when using sideways relief remains (greater of £50,000 or 25% of adjusted income).

• If you claim the £1,000 trading income allowance (for small-scale income) you cannot use that allowance to generate or enlarge a trading loss.

• Time limits remain important: for example, claims for losses against earlier years (carry back) need to be made within the appropriate deadlines.

Given these updates, it’s more important than ever to review how your accounting period aligns with the tax year, how your loss arose (cash vs accrual), and which relief route makes most sense for you.