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Losses made in the opening years of a business can be carried back against the total income of the preceding three tax years.

However, this is not the only option for relieving early year losses. The loss can also be set against other income for the year in which the loss was incurred or the previous tax year or carried forward against future trading profits.

The basic aim of loss relief planning is to obtain relief at the highest marginal rate of tax and earlier rather than later. The decision as to which route to take to relieve the loss will depend on the level of other income, expected future profits, income of previous years and the rates of tax in the years concerned.

It should be noted that since 6 April 2013 relief for losses and qualifying loan interest are subject to a cap, which is set at the greater of £50,000 and 25% of income. Where the loss arises in a trade carried on by an individual or a partner in a non-active capacity, sideways loss relief claims are capped at £25,000 a year.

Choose The Method Of Tax Relief For Early Year Losses
Jane starts her business on 1 January 2015 and makes a loss of £10,000 for 2014/15.

She has other income of £30,000 in 2014/15 and had income of £8,000 in 2013/14. In 2011/12 and 2012/13 she had income of £5,000 and £6,000 respectively.

She secured a major contract in May 2015 and as a result expects her profits to be £100,000 in 2015/16.

Jane can relieve the loss against her other income of 2014/15 of £30,000, but she will only receive relief at the basic rate of 20%. However, if she carries the loss forward and sets it against the profits of £100,000 for 2015/16 she will receive relief at 40%. By choosing this option, the loss saves her tax of £4,000, rather than £2,000 if it is set against other income of 2014/15.

It is not worthwhile carrying the loss back to 2011/12 as her income for that year is offset by her personal allowances.