Your Business Made a Loss. Here Is How to Turn That Into a Tax Refund

Did you know a trading loss can unlock a refund of income tax you have already paid to HMRC? Under UK tax law, a loss does not simply disappear – it comes with legal tools attached. The mechanism is called section 64 relief under the Income Tax Act 2007 (ITA 2007), and knowing how to use it correctly could mean thousands of pounds back in your pocket.

This is not a loophole. It is the law. The question is whether you are using it and using it in the right direction.

What Happens When Your Business Makes a Loss?

When a sole trader or self-employed business person makes a trading loss for a tax year, the trading income assessment for that year is nil. “Trading income” taxes profits only – if there is no profit, there is nothing to tax on the trading side. The loss does not vanish, though. It is calculated the same way as a profit, and you then have a legal choice about what to do with it.

The most powerful and flexible tool available to a continuing business is section 64 ITA 2007, which allows you to set that loss against other income you have earned – and potentially recover income tax already paid.

Step One: Allocating the Loss to the Right Tax Year

Before you can claim relief, the loss must be allocated to the correct tax year. From 2024/25, the UK operates on a tax year basis (sometimes called the “arising basis”). This means the loss for a tax year is the actual trading loss that falls within 6 April to 5 April of that year.

If your accounting year end is 31 March (or 5 April), allocation is straightforward – the full year’s results belong to the corresponding tax year. If your year end falls at any other point in the calendar, you need to apportion the loss between the two tax years it straddles.

Key principle: A loss for a tax year only arises when the apportionment of results produces an overall loss. If a loss period overlaps with a profit period and the blended figure is still a profit, there is no loss for that year – just a reduced assessable profit.

Worked Example 1 – Sophie, Freelance Marketing Consultant

Sophie prepares accounts to 31 December. Her trading results are:

Sophie wants to know her taxable profit or loss for 2024/25 and 2025/26.

2024/25 Calculation:

2025/26 Calculation:

The trading loss for 2025/26 is £3,600. That is the figure Sophie can claim relief on. Notice that 2024/25, despite overlapping with the loss year, results in a profit because the stronger 2024 figures dominate that nine-month slice.

Section 64 ITA 2007: Setting a Loss Against Other Income

Section 64 of the Income Tax Act 2007 (ITA 2007) allows a trading loss to be set against “net income.” Understanding what net income means is not optional – it is the difference between a strong tax saving and a wasted one.

Net income defined: Net income = Total income from all sources (trading profits, rental income, employment income, savings interest, dividends) MINUS any deductible payments (such as gross personal pension contributions). It is calculated BEFORE the personal allowance is applied.

The trading loss is deducted from net income. Whatever remains after the loss is then reduced by the personal allowance (currently £12,570 for 2024/25 and 2025/26) to give taxable income. Tax is charged on taxable income.

The loss can be set against net income for the tax year in which the loss arose (the current year) and/or the preceding tax year. These are two separate, independent claims. You can make one, both, or neither – in any order.

The Ground Rules You Must Know

Three rules define how section 64 works in practice:

1. A section 64 claim is not mandatory. You decide whether to make it. Sometimes it is better not to claim – for example, when the carry-forward option (explained in Subject 11B) delivers more value.
2. No partial claims are permitted. If you choose to claim section 64 relief for a particular year, you must use the FULL amount of the available net income in that year, or exhaust the entire loss, whichever happens first. You cannot claim only part of the loss to protect the personal allowance. The only choice is: claim for that year, or do not claim for that year.
3. The trade must be commercial. Section 64 is only available if the trade is carried on on a commercial basis with a genuine view to making a profit (section 66 ITA 2007). HMRC can challenge claims where the activity resembles a hobby rather than a business.

The no-partial-claims rule is the most important thing to understand before you make a claim. If you set the loss against a year where net income is low – perhaps already close to or below the personal allowance – you may relieve income that was never going to be taxed anyway. That is a wasted loss. Planning ahead avoids this.

Worked Example 2 – Claire, Self-Employed Graphic Designer

Claire’s trading results and income:

The trading loss of £14,000 arises in 2023/24. Claire can claim section 64 relief against the current year (2023/24) and/or the preceding year (2022/23). First, build up the full income picture:

Option A: Claim current year (2023/24) first, then preceding year (2022/23)

Under Option A, the loss is first used against 2023/24 net income (£11,500), exhausting that year. The remaining £2,500 is then claimed against 2022/23. The personal allowance in 2023/24 is entirely wasted – there is no income left to apply it against.

Option B: Claim preceding year (2022/23) only

Under Option B, the full £14,000 loss is set against 2022/23 net income. The 2023/24 income of £11,500 is fully covered by the personal allowance anyway – no tax would have been due there regardless. Only £1,070 of personal allowance is wasted (£12,570 minus £11,500).

Tax saved by choosing Option B over Option A: £3,286 – £986 = £2,300

Same loss. Same tax year. Very different outcome because of where the claim was directed.

Why Option B Wins: The Logic Behind the Numbers

In 2022/23, Claire has £31,500 of net income – well above the personal allowance. Every pound of loss set against that year saves tax at 20% on real, taxable income.

In 2023/24, her net income is only £11,500, which is already below the personal allowance (£12,570). Without a section 64 claim, that income would attract zero tax anyway – the personal allowance already covers it. Setting a loss against income that was never going to be taxed generates no saving. It just consumes the loss.

The principle is straightforward: set your trading loss against the income that is actually being taxed, in the year where it saves the most. Planning this before submitting the return is what turns a loss year into a strategic financial event.

The Mindset That Changes Everything

Here is something the most resilient business owners understand – and that too few accountants take the time to explain: a difficult trading year is not just a number on a return. In the UK tax system, it carries a tool with it.

The ability to reclaim tax already paid – to turn a hard year into real working capital returned to the business – is not a theoretical concept. It is cash. And that cash, reinvested at the right moment, can fund the growth that makes the next year stronger.

The entrepreneurs who come back strongest from difficult periods are often not the ones who avoided the difficulty – they are the ones who made the best decisions during it. Understanding section 64 is one of those decisions. The planning takes minutes. The saving can last years.

What to Do Next

Section 64 relief is available when your trade is run commercially with a genuine view to profit. The timing and direction of the claim matter enormously, as the example above shows. The decision should be made using your complete income picture – not just your trading results.

Subject 11B covers the three factors that determine which option saves the most, plus two additional relief routes (extension to capital gains under section 71 ITA 2007, and carry forward under section 83 ITA 2007) that most business owners never consider.

If you are working through a difficult trading year – or want to know in advance how a potential loss would be handled – that conversation is exactly what we are here for.

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Zazentax – Smarter Accounting and Automation for UK Businesses | Subject 11A

All figures correct to HMRC guidance as at June 2026. Personal allowance £12,570 (frozen to 2027/28). Legislative references: ITA 2007 ss.64, 66. This article is for general educational purposes only and does not constitute tax advice. Please consult a qualified adviser for your specific situation.