If your business incurs a loss in a tax year, you may be able to carry forward that trading loss to offset against future profits, potentially reducing your future tax bills. Carrying forward trading losses is a valuable tax relief option that can help improve your business’s cash flow and provide financial stability as you work towards profitability.



What Does Carrying Forward Trading Losses Mean?

Carrying forward trading losses allows businesses to apply their current year’s losses to future tax years. This means that if your business has more expenses than income in a given tax year, you can use that loss to reduce taxable profits in future years, lowering the amount of tax you’ll need to pay.

Who Can Carry Forward Trading Losses?

Both sole traders and limited companies can carry forward trading losses, though the rules and processes vary slightly:

• Sole Traders and Partnerships: Sole traders and partnerships can carry forward losses to offset against future profits from the same trade.
• Limited Companies: Companies can carry forward trading losses to reduce profits from future accounting periods. Limited companies may also be able to offset these losses against other forms of income under certain circumstances.

How to Carry Forward Trading Losses

1. Record the Loss on Your Tax Return: In the year your business makes a loss, report it on your Self Assessment tax return if you’re a sole trader, or on the Company Tax Return if it’s a limited company.
2. Offset Against Future Profits: In subsequent years, when your business turns a profit, you can apply the carried-forward loss to reduce the taxable amount. This reduces the corporation tax (for companies) or income tax (for sole traders) owed on your profit.
3. Report Each Carry-Forward Year: You must indicate on each year’s tax return when you are carrying forward losses to ensure they are properly applied.

Advantages of Carrying Forward Trading Losses

1. Reduced Tax Bills in Profitable Years: Offsetting trading losses against future profits can significantly reduce taxable income, lowering the tax burden.
2. Improved Cash Flow: By reducing future tax liabilities, you retain more capital in the business, which can be reinvested or saved as a financial cushion.
3. Flexible Use: Carry-forward relief can be used when your business becomes profitable, allowing you to plan for future tax savings.

Key Considerations

• Loss Must Be Applied to the Same Trade: Generally, carried-forward losses can only be applied against future profits from the same business activity.
• Time Limit: There’s no strict time limit for carrying forward losses in the UK; however, they can only be used when you make a profit in the future.
• Claiming Other Reliefs: In some cases, businesses might benefit from carrying back losses to the previous year or offsetting losses against other types of income. Consulting a tax professional can help identify the best option.

Example

If your business has a £10,000 trading loss in the 2022/23 tax year, you could carry forward that loss and apply it to a £20,000 profit in 2023/24, reducing your taxable profit to £10,000. This adjustment lowers the tax owed on your 2023/24 profit, freeing up more funds for business use.

Carrying forward trading losses is a beneficial relief mechanism for businesses, especially in early or challenging years. Taking advantage of this relief can make a significant difference in the long-term tax efficiency and growth potential of your business.