What are business losses?

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Understanding how business losses work can help you avoid paying more tax than necessary and make better financial decisions while your business is growing.

What Are Business Losses?

A business loss happens when your allowable business expenses are higher than your business income during a tax year or accounting period.

For example:

• Business income: £18,000
• Allowable expenses: £24,000
• Business loss: £6,000

Although making a loss is never ideal, it does not automatically mean something has gone wrong. Many new businesses make losses in their early years while they invest in equipment, marketing, training, or building a customer base.

Are Business Losses Tax Deductible?

Yes, business losses are generally tax deductible because they can be used to reduce the amount of tax you pay.

The way you claim relief depends on your business structure and your personal circumstances.

For sole traders and partnerships, losses may be used against:

• Future profits from the same business.
• Other income in the same tax year (if you qualify).
• Income from the previous tax year in certain cases.
• Capital gains in some situations.

For limited companies, losses normally reduce future taxable profits of the company rather than the directors’ personal income.

Because the rules vary, it is important to understand which type of loss relief applies before submitting your tax return.

If you are unsure which business expenses are allowed in the first place, our guide on What Self Employed Expenses Can I Claim? explains many of the common deductions available to UK businesses.

Can Business Losses Be Carried Forward?

Yes. In many cases, carrying business losses forward is the most common way to claim tax relief.

This means that if your business makes a loss this year but earns a profit next year, the earlier loss can usually reduce the taxable profit of the later year.

For example:

• 2025/26 business loss: £8,000
• 2026/27 business profit: £25,000

Instead of paying tax on the full £25,000 profit, you may only pay tax on £17,000, assuming the entire loss qualifies to be carried forward.

This can significantly reduce your future tax bill and help businesses recover financially after difficult trading periods.

Can You Claim Business Losses Against Other Income?

Sometimes.

Sole traders may be able to claim certain losses against income such as employment income or property income, provided the relevant HMRC conditions are met.

This type of relief can produce an immediate tax refund instead of waiting until future years, but it is not available in every situation. The rules can become more complex if the business is not run on a commercial basis or if losses continue for several years.

What Causes Business Losses?

Many perfectly healthy businesses experience losses from time to time.

Common reasons include:

• High start-up costs.
• Purchasing equipment or machinery.
• Increased advertising and marketing.
• Seasonal reductions in sales.
• Unexpected increases in supplier costs.
• Economic downturns.
• Temporary reduction in customers.

A single loss-making year does not necessarily indicate that a business is failing. Many successful businesses experience periods of lower profits while investing for future growth.

What Expenses Can Create a Business Loss?

A business loss is usually created by claiming legitimate business expenses such as:

• Office costs.
• Business insurance.
• Professional fees.
• Software subscriptions.
• Vehicle expenses.
• Tools and equipment.
• Marketing costs.
• Telephone and internet used for business.

Only allowable business expenses can be claimed. Personal spending cannot normally be deducted.

If you are looking for practical ways to reduce your taxable profit legally, you may also find our article How to Avoid Paying Tax on Self-Employed Income useful.

Should You Always Claim a Business Loss?

Usually, yes.

If you qualify for loss relief, claiming it can reduce your tax bill now or in the future. However, the best option depends on your overall income, future profits, and personal circumstances.

For example, someone expecting much higher profits next year may benefit more from carrying losses forward, while another person with employment income may benefit from claiming relief immediately.

Choosing the right option can make a significant difference to the amount of tax you ultimately pay.

Keep Accurate Records

Whenever your business makes a loss, good record keeping becomes especially important.

You should keep:

• Sales records.
• Receipts for business expenses.
• Bank statements.
• Invoices.
• Accounting records supporting the loss calculation.

Good records make it much easier to support your figures if HMRC ever asks questions and help ensure you receive all of the tax relief you are entitled to.

If you complete a Self Assessment tax return, our guide Can I Do a Self-Assessment Tax Return Myself? explains what is involved and when professional advice may save both time and money.

Final Thoughts

Business losses are not simply bad news—they can also provide valuable tax relief. Depending on your circumstances, you may be able to offset losses against other income, carry them forward to reduce future tax bills, or use other HMRC loss relief rules that apply to your situation.

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