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Where Taxpayers and Advisers Meet

(Sole Trader) Loss relief - carry losses back or set the loss against total income?

Joined:Tue May 25, 2021 8:44 pm
(Sole Trader) Loss relief - carry losses back or set the loss against total income?

Postby lattelover » Wed May 26, 2021 9:52 am


I am employed and pay taxes through PAYE, and I have to file returns every year through Self Assessment.

I have also registered as a sole trader, have ONLY started trading in 1st May 2020, and have recorded a loss for 2020/21 tax year. I anticipate making a loss for 2021/22 year, and hopefully making an income from 2022/23 and onwards

My question is regarding loss relief. Should I:
1) Carry the loss for 2020/21 tax year to the previous three tax years of employment income, go against the later years first (i.e. starting with 2019/20)
2) Set the loss against my total income of the three years immediately before the loss year, starting with the income of the earliest years first (i.e. starting with 2017/18)

Assume that the self-employment loss is smaller than my average yearly income from employment, so I won't claim relief in more than one tax year. (I assume I cannot choose which tax year to set the income against for both scenarios?)

Is there a difference between the two options? My yearly income is approximately the same for all these tax years, so it doesn't make too much of a difference which year I set it off against. Which optionwill give me more flexbility? Am I missing something?

Joined:Mon Mar 11, 2019 4:22 pm

Re: (Sole Trader) Loss relief - carry losses back or set the loss against total income?

Postby Jholm » Wed May 26, 2021 10:38 am

Loos planning would generally involve working out what is the best option financially. Since you have said income is broadly similar, this does not seem to matter too much.

Whilst you can carry forward, it is often wise to offset against the earlier years, since they will be the first to drop off when you are looking to relieve next year's loss. There is scope for wasting some losses though due to it offsetting income to nil rather than to the limit of the personal allowance.

If you anticipate much larger income in the future years, you may prefer to carry the losses forward and relive it against potential higher-rate tax in the future.

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