Trading Loss Strategy: Three Factors That Determine Whether You Save Hundreds or Thousands

Did you know two business owners with identical trading losses can end up with completely different tax bills, simply because one of them knew which year to claim in? Loss planning is not complicated. But it requires knowing three things before you submit the return. This article gives you all three.

Subject 11A covered what section 64 ITA 2007 does: it allows you to set a trading loss against your net income (total income from all sources, before personal allowances) in the current year and/or the preceding year. This article covers how to decide which option is best, and introduces two additional relief routes that are available if section 64 does not fully solve the problem.

The Three Factors of Effective Loss Planning

When choosing how to use a section 64 loss claim, three factors determine which option delivers the most value. Work through all three before making the claim.

1. Marginal rate of tax – which year has income taxed at the highest rate?
2. Personal allowance wastage – will the claim wipe out income that was not going to be taxed anyway?
3. Timing – when do you need the cash, and how does this affect future claims?

Factor 1 – Marginal Rate of Tax

The “marginal rate of tax” is the rate applied to the next pound of your income. In the UK, income tax is charged in bands, not as a flat rate on everything you earn:

When you set a trading loss against net income, every pound of relief saves you tax at the rate that income was being charged at. A pound of loss against income taxed at 40% saves 40p. Against income taxed at 20%, it saves only 20p. The logic is clear:

Always aim to set the loss against the year with the highest-taxed income. If one year has income in the higher-rate band (above £50,270) and the other does not, claim in the higher-rate year first. The relief is twice as valuable there.

Where the income includes dividends, the dividend tax rates also apply: 8.75% at basic rate, 33.75% at higher rate, 39.35% at additional rate. The principle is the same, match the loss to the income taxed at the highest available rate.

Factor 2 – Personal Allowance Wastage

Every UK taxpayer receives a personal allowance, currently £12,570 for both 2024/25 and 2025/26 (the allowance has been frozen at this level through to 2027/28). It reduces net income to nil before tax applies. Income below £12,570 attracts no income tax.

The critical rule of section 64 is that no partial claims are permitted. If you claim the loss for a year, you must use it up to the full net income for that year (or exhaust the loss entirely). This means it is possible to reduce net income all the way to nil, eliminating income that the personal allowance would have covered anyway. When that happens, the personal allowance for that year is wasted.

Wasted personal allowance is not carried forward. It disappears. For a basic-rate taxpayer, each pound of personal allowance is worth 20p in tax savings. Wasting the full £12,570 personal allowance costs £2,514 in foregone relief.

Before making the claim, check each year’s net income against the personal allowance. If one year already has net income below £12,570 (meaning income is already fully sheltered by the allowance), setting a loss against that year generates no real tax saving, it just consumes the loss. The year with net income well above the personal allowance is where the loss does the most work.

Factor 3 – Timing

Timing matters for two distinct reasons.

First: cash flow. A claim against the preceding year recovers tax that has already been paid. If you made a profit in 2022/23, paid your tax in January 2023, and then made a loss in 2023/24, a section 64 claim against 2022/23 can result in a repayment from HMRC in early 2025. That is real working capital returned to the business at a time when trading has been difficult. For a business recovering from a loss year, the timing of that repayment can matter.

Second: protecting future income. Section 64 can only be used against the current year and the preceding year. If you claim against the current year, you reduce that year’s income. Should another loss arise in the following year, there is less income available to absorb it. Claiming against the preceding year preserves the current year’s income for future use, which is particularly relevant when trading results are volatile.

General principle: where the choice produces equal tax savings, relieve the loss earlier rather than later. An earlier year’s income is confirmed and certain; a later year’s income may still change.

Extension to Capital Gains: Section 71 ITA 2007

If you have claimed section 64 relief against net income but the trading loss still has an unused balance, there is a second tool available: extension to capital gains.

Under section 71 ITA 2007 (alongside section 261B of the Taxation of Chargeable Gains Act 1992, or TCGA 1992), any remaining trading loss can be treated as an allowable loss for capital gains tax (CGT) purposes. It can then be set against any chargeable capital gains arising in the same year.

In practice, this means:

• You must have first made (or been unable to make) a section 64 claim against net income. You cannot skip straight to capital gains without attempting the income relief route.
• The balance of the trading loss that could not be used against income is converted into an allowable capital loss for that year.
• It reduces your net chargeable gains, which reduces the CGT liability. CGT rates for 2024/25 are 18% for basic-rate taxpayers and 24% for higher-rate taxpayers on most gains. Residential property gains attract the same rates from 30 October 2024.
• If the capital gains extension is claimed, the loss cannot then be carried forward under section 83 (explained below), the same pound of loss cannot be used twice.

The extension to capital gains is particularly useful in years where a business owner has sold an asset, property, shares, or business assets, and has a CGT liability that a trading loss could partially or fully extinguish. It is a relief that requires both a loss on the trading side and a gain on the capital side in the same tax year.

Carry Forward: Section 83 ITA 2007

If a section 64 claim is not made, or if the loss still has an unused balance after section 64 and section 71 relief, the remaining trading loss can be carried forward under section 83 ITA 2007.

When is carry forward the better choice?

If your net income in both the current and preceding year is below the personal allowance, a section 64 claim would relieve income that was never going to be taxed. In that case, carrying the loss forward and waiting for a profitable year, when it will save tax at the basic or higher rate, is more valuable than claiming it now for zero benefit.

Restrictions: What You Need to Know

Two restrictions apply to loss relief claims under this chapter:

1. Commercial basis (section 66 ITA 2007): Section 64 (and by extension sections 71 and 83) is only available when the trade is carried on on a commercial basis with a genuine expectation of profit. HMRC can, and do, challenge claims where the activity is a hobby dressed as a business, or where there is no realistic route to profitability.
2. The cap on unlimited income tax reliefs (section 24A ITA 2007): Introduced from 6 April 2013, this cap limits total reliefs (including section 64 losses claimed against general income) to the higher of £50,000 or 25% of adjusted total income (“adjusted total income” is your total income before the loss relief claim). This cap affects very few sole traders, but is relevant where trading losses are exceptionally large relative to other income in the same year.

A Decision Framework: Six Questions Before You Claim

Before making or advising on a section 64 claim, work through these questions in order:

1. What is the net income for the current year and the preceding year?
2. In which year is net income highest above the personal allowance (£12,570)?
3. In which year is the marginal rate of tax highest (basic, higher, or additional rate)?
4. Will claiming in either year waste the personal allowance? If so, by how much?
5. Are there chargeable capital gains in either year that could benefit from the section 71 extension?
6. If carry forward under section 83 is the alternative, when is the next profitable year likely to be?

This framework is not complicated, but it requires a complete picture of income, gains, and allowances across two years. A decision made looking only at trading results will often miss the optimal outcome. The full picture is what changes the number.

The Confidence to Act on What You Know

Loss planning is one of those areas where knowledge is directly worth money. The difference between claiming section 64 in the wrong year and the right year is not a matter of effort, it is a matter of knowing the rules and applying them correctly. And the difference can be thousands of pounds.

Business owners who understand this do not just save on one return. They start asking: “What is the most tax-efficient use of this number?” every time a significant figure appears. That question, applied consistently over a career, compounds. It is not about doing more, it is about thinking differently about the numbers you already have.

You do not need to be a tax expert to benefit from this thinking. You need to understand enough to ask the right questions of the right people, and to know when the advice you are receiving has considered all three factors above, not just the most obvious one.

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Legislative references: ITA 2007 ss.64, 66, 71, 83; s.24A (cap); TCGA 1992 s.261B. CGT rates per HMRC guidance as at 30 October 2024. Personal allowance £12,570 frozen to 2027/28. This article is for general educational purposes only and does not constitute tax advice.