Using Losses to Reduce Tax in 2025/26: What Can Be Carried Forward and Offset
Losses are an inevitable part of many businesses and investments, particularly in the early stages or during periods of change. While losses are never welcome, the UK tax system does allow them to be used in ways that can reduce tax bills — either now or in future years.
However, the rules around loss relief are not straightforward. What you can do with a loss depends on how it arose, what type of income it relates to, and your wider tax position.
For the 2025/26 tax year, the underlying framework for loss relief remains consistent, but misunderstandings are common. In this post, we explain the main types of losses, how they can be used, and the key restrictions to be aware of.
What Is a Tax Loss?
A tax loss arises where allowable expenses exceed taxable income for a particular activity.
Common examples include:
- A sole trader whose business expenses exceed income
- A property owner whose allowable costs exceed rental income
- A capital loss arising on the sale of an asset
Losses are calculated under tax rules, not purely accounting rules, which means the starting point is always taxable profit, not cash flow.
Different Types of Losses
Loss relief depends heavily on the type of loss. The main categories are:
- Trading losses (sole traders and partnerships)
- Property losses
- Capital losses
- Losses within limited companies
Each has its own rules, and they cannot be used interchangeably.
Trading Losses (Sole Traders and Partnerships)
Trading losses arise where a self-employed business or partnership makes a loss for tax purposes.
Options for using trading losses
A trading loss can usually be used in one of the following ways:
-
Against other income in the same tax year
-
Carried back to earlier tax years
-
Carried forward to offset future trading profits
The choice can have a significant impact on cash flow and tax repayments.
Set losses against other income
One option is to offset a trading loss against other taxable income in the same tax year, such as:
- Employment income
- Rental income
- Investment income
This can generate a tax repayment, which is often helpful where losses occur early in a business’s life.
However, there are restrictions where the trade is considered:
- Non-commercial, or
- Not carried on with a view to profit
Carry losses back
Trading losses can also be carried back to earlier tax years, usually:
- To the previous tax year, or
- In some cases, to the three previous tax years (for early years of a trade)
Carrying a loss back can trigger a repayment of tax previously paid.
Carry losses forward
Alternatively, trading losses can be carried forward and set against future profits of the same trade.
This is often the most straightforward option, particularly where:
- The business is expected to become profitable
- Other income is already taxed efficiently
- A repayment now is less valuable than reduced tax later
Carried-forward losses do not expire, but they can only be used against profits from the same trade.
Property Losses
Property losses are treated differently from trading losses.
If your allowable property expenses exceed rental income:
- The loss cannot usually be set against other income
- It must be carried forward to offset future profits from the same property business
This applies whether the property income comes from:
- UK residential property
- Commercial property
- Furnished holiday lettings (where still relevant)
Property losses can only reduce future property profits, not employment or trading income.
Capital Losses
Capital losses arise when an asset is disposed of for less than its allowable cost.
Examples include:
- Selling shares at a loss
- Disposing of investment property at a loss
Capital losses can be used to:
- Offset capital gains in the same tax year
- Be carried forward to offset future capital gains
They cannot be used against income.
Capital losses must be claimed and reported to HMRC in order to be carried forward.
Losses in Limited Companies
Limited companies calculate losses under corporation tax rules.
Common options include:
- Carrying trading losses forward against future profits
- Carrying losses back to offset profits from earlier accounting periods
- Using losses within a group (where group relief applies)
Loss utilisation in companies is subject to additional restrictions, particularly for larger companies and groups.
Why Loss Planning Matters
Losses are not automatically used in the most beneficial way.
Choosing how to use a loss involves considering:
- Current and future income levels
- Marginal tax rates
- Cash flow needs
- Long-term plans for the business or investment
Using losses inefficiently can mean:
- Missing out on repayments
- Wasting allowances
- Delaying tax relief unnecessarily
Once a loss claim is made, it may be difficult or impossible to reverse.
Common Misunderstandings
Some frequent areas of confusion include:
- Assuming all losses can be set against salary
- Believing losses are refunded automatically
- Mixing up capital and trading losses
- Forgetting to claim losses within the required time limits
- Expecting property losses to reduce other income
These issues often only come to light when HMRC queries a return or a future profit arises.
Time Limits for Claiming Loss Relief
Loss claims are subject to deadlines.
In most cases:
- Claims must be made within four years of the end of the tax year in which the loss arose
Missing the deadline can mean the loss is lost permanently.
Summary
For the 2025/26 tax year, losses can still play a valuable role in reducing tax, but only when applied correctly.
In summary:
- Trading losses offer the greatest flexibility
- Property losses are more restricted
- Capital losses can only offset gains
- Losses must be claimed and used deliberately
Understanding which losses you have — and how they can be used — is essential to managing tax efficiently.
If you’ve made a loss and are unsure how best to use it, or you want to check whether a previous loss has been claimed correctly, a short review can often clarify your options. You can book a free 30-minute call to talk through your position and ensure any available loss relief is being used in the most appropriate way for 2025/26.
