Against Profits of the Same Trade
The default position is that the loss will be carried forward (while you are still carrying on the same trade) and set against the profits of subsequent years. You can, however, claim to set it against profits from previous years from the same trade.
There is a temporary extension of loss relief against trading profits of previous years – if the loss arose in the tax years 2008/09 or 2009/10, you can carry it back against profits of the previous three years from the same trade. There is a cap of £50,000 on the losses that can be claimed in this way.
When you cease trading, you can also carry the loss of the last 12 months of trading back against profits of the previous three years.
Against “General Income”
The above reliefs all reduce the profits of the same trade as the one which made the loss; it is also possible to use the loss against your other income (salaries from employment, dividends, bank interest, and so on) of the same tax year as the loss or the year before it.
If you start a new trade and make a loss in the first four tax years in which you are carrying on that trade, you can carry the loss back against your general income of the three years before the year in which you make the loss. This is particularly useful for those brave enough (or redundant enough!) to leave a well paid job and “go it alone” as a freelance trader – a repayment of some tax paid at 40% when they were employed can be a great help in the difficult first years of a new trade.
Against Capital Gains
Finally, if you have already claimed relief for a loss against your general income of the same year and there is some loss left over, you can if you wish claim it against capital gains of the same tax year – but think carefully before you do this as the relief will be at the CGT rate of 18% (10% if you qualify for Entrepreneurs Relief) whereas if it is relieved against income of another tax year the relief will be at between 20% and 60% depending on your level of income.
Class 4 NIC
Self-employed traders pay Class 4 National Insurance Contributions on their profits, at 8% on profits between £5,715 and £43,875 and at 1% on any profits above that upper limit.
If you claim relief for a loss against profits of the same trade, you will get a reduction in your Class 4 NIC liability automatically, but if you claim relief for the loss against your general income then there will be a loss that has been relieved for income tax purposes but not as far as Class 4 NIC is concerned. The same applies if you claim the loss against capital gains of the same tax year – you will not have had relief for Class 4 NIC.
It is important to remember that the rules for NIC loss relief operate separately from those for income tax. If you have claimed loss relief against your general income then that same loss will still be available to carry forward (while you still carry on the same trade) and used to reduce your liability to Class 4 NIC for subsequent tax years.