Since 2013 there’s been a limit to using trading losses against other income. It is known as the cap and it depends on how you use the losses. If used to reduce tax on other income the limit is the greater of 25% of your adjusted total income, and £50,000.
Relief for trading losses from your business can be used to reduce tax paid or a liability, for example, arising on income from employment, property or savings. It can be used for the same year or the tax year before the loss occurred and is called sideways loss relief.
However you aren’t able to choose how much of the loss to use for sideways relief – it’s all or nothing – so careful planning is vital to get the best result and not waste your personal allowance or another exemption.
The government has made a temporary pandemic concession on carrying claims back for a longer period than usual. These rules allow you use the losses made in 2020/21 and 2021/22 against income of the three previous tax years rather than just the same or previous year.
In addition, you can choose to claim only against the current year or the previous year, rather than both. The special coronavirus rules mean that relief is against trading income only for years two and three, so if you have other income in these years, you can avoid losing your tax-free personal allowance. If you can’t claim sideways loss relief because you haven’t any other income, you can still claim the new coronavirus carry back relief.
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