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How Do You Obtain Income Tax Relief For Losses?

I know you want to make a profit, but ...



Are you self-employed or thinking of becoming self-employed? Hopefully, you will be making profits, but if you are in the red in those early years, how do you get income tax relief?

If you make a loss in those early years, you can offset your income tax against a number of reliefs!

If you make a loss in those early years, you can offset your income tax against a number of reliefs!

copyright: gpointstudio / 123rf stock photo

There are several ways in which income tax relief can be obtained and I've explained each of them for you below:

Early years' loss relief

The most generous provisions apply in those early years trade (the first four years). If a loss is sustained in any of these years, that loss can be carried back and set against other income - such as income from employment, rental income or dividends - of the three preceding tax years.

The benefit of this is that it may result in a significant tax refund, particularly if you are both employed and self-employed or were in employment prior to becoming self-employed.

The cost is that the claim is an all or nothing claim and can't be tailored to preserve personal allowances, which may, as a result, be wasted. In addition the, loss must be set against the earliest year first.

Sideways loss relief

Sideways' loss relief allows the individual to set the loss against their other income. Similar to the early years' loss relief, the loss can be set against other income, but in this case, it is the income of:

  1. the tax year in which the loss occurred; or

  2. the previous tax year; or

  3. both the current and the previous tax year, in any order, if the loss is not fully utilised against one of those years.

Carry forward against future profits

There may be circumstances when it isn't appropriate to use the early years' or sideways loss reliefs, for example, if carrying the loss back or sideways results in a waste of the personal allowance.

Losses can also be carried forward and set against future profits of the same trade.

Terminal losses

As in the early years, special rules apply to losses incurred in the final 12 months of trading. This is referred to as a terminal loss and can be set against profits from the same trade in the year of cessation and profits of the same trade in the three tax years prior to that in which the trade ceased. Relief is given against profits of the latest year first.

Extension to capital gains

Where losses remain available after a sideways loss relief claim, the remaining loss can be set against any capital gains arising in that year.

Whether this is worthwhile will depend on the rate of capital gains tax payable and whether the annual exemption has been utilised, as again, it is not possible to tailor the claim.

"Beware the cap on income tax reliefs!"

A cap applies which places a limit on the extent to which reliefs can reduce a person's income. The cap is set at the greater of £50,000 and 25% of the individual's adjusted total income for the tax year in question. A number of reliefs come within the scope of the cap including the loss reliefs outlined above.

In deciding how to use the losses, the aim should be to obtain relief at the highest marginal rate possible and as early as possible, and remember that you should always take professional advice before making any financial decisions as my blog post is only for general guidance.

"Would you like to know more?"

To find out more about income tax reliefs or anything else to do with tax planning, do give me a call on 01908 774323 or click here to send me an email enquiry and let's see how I can help you.

Until next time ...


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More about Helen Beaumont ...

Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.

Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.

When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.