You have just filed your first set of accounts for your new limited company. The numbers show a loss. Perhaps you spent heavily on equipment, marketing, or stock before any revenue came in. That is common for new businesses. And it raises an obvious question: how does corporation tax work when there is no profit to tax?

The short answer is straightforward. You do not pay corporation tax on a loss. But the longer answer matters more. The way you handle that loss on your corporation tax return (the CT600) determines how much tax you save in future years. Get it right and you turn a difficult first year into a valuable tax asset. Get it wrong and you leave money on the table.

As ICAEW qualified accountants, we work with new companies across the UK every week. From a freelance consultant in Manchester incorporating for the first time to a husband-and-wife team opening a café in Birmingham. The loss relief rules are the same. But the best option depends on your specific circumstances.

What Is a Trading Loss for Corporation Tax Purposes?

A trading loss occurs when your company's allowable expenses exceed its income in an accounting period. This is calculated on the same basis as your profit would be. You deduct the same allowable expenses: salaries, rent, materials, marketing, professional fees, and capital allowances on equipment.

But there is a distinction between a trading loss and a non-trading loss. A trading loss comes from your core business activities. A non-trading loss comes from things like property rental or loan interest. The relief rules differ. This article focuses on trading losses, which is what most new companies deal with.

If your company also has capital gains in year one (selling an asset at a profit) but an overall trading loss, you can offset the loss against the gain. That is a separate calculation. For most new companies, the loss is purely from trading.

Loss Relief Options for a New Company

You have four main options for how to use a trading loss. Some apply immediately. Some apply later. Some require a formal claim on the CT600. Here they are in order of how you would typically consider them.

Option 1: Carry Forward Loss Relief

This is the default option. You carry the loss forward to future accounting periods and offset it against profits from the same trade. You do not need to make a formal claim. It happens automatically on your CT600 in the year you have profits to use it.

The key rule: you can only offset carried-forward losses against 50% of your profits in any single year (for accounting periods starting on or after 1 April 2017). There is a £5 million threshold below which this restriction does not apply. For most small companies, that means you can use 100% of the loss against profits up to £5 million. Beyond that, the 50% cap kicks in.

Example: Your new company makes a loss of £20,000 in year one. In year two, it makes a profit of £35,000. You carry forward the £20,000 loss and offset it against year two profits. You pay corporation tax on £15,000 at 19% (assuming profits under £50,000) = £2,850. Without the loss, you would have paid £6,650. The loss saves you £3,800 in tax.

Carry forward is simple. It requires no immediate action. But it does mean you wait until you have profits to use the relief.

Option 2: Carry Back Loss Relief

If your company had profits in the previous accounting period, you can carry the loss back and reclaim corporation tax already paid. For a company in its first year, there is no previous period. So this option is unavailable. But it is worth knowing for future reference.

The carry-back period is 12 months. You can extend this to 24 months for losses arising in accounting periods ending between 1 April 2020 and 31 March 2022 (COVID temporary extension, now expired). For a normal year, one year back is the limit.

For a company in year one, this is not relevant. But if you had a profitable pre-trading period or a short first period that was profitable followed by a loss-making second period, it could apply.

Option 3: Claim Against Total Profits (Current Year)

If your company has other income in the same accounting period (bank interest, property income, capital gains), you can offset the trading loss against those profits first. This is a current year claim. You make it on the CT600.

Example: Your new company has a trading loss of £15,000 but also earned £3,000 in bank interest. You can offset £3,000 of the loss against the interest. You pay no corporation tax on the interest. The remaining £12,000 loss carries forward.

This is often the most efficient option if you have any non-trading income in year one. Even small amounts of interest or property income can be sheltered.

Option 4: Terminal Loss Relief

This applies when a company ceases to trade. If you close the company in year one (or any year), you can carry the loss back up to three years. The loss must be from the final 12 months of trading. This is a specific claim made on the CT600 and requires the company to stop trading permanently.

For most new companies, this is not the goal. But if you incorporated and the business did not work out, terminal loss relief lets you recover corporation tax paid in earlier profitable periods (if any existed). For a year-one loss with no prior profits, there is nothing to reclaim.

How to Report a Loss on Your CT600

You still file a corporation tax return even if you made a loss. The CT600 includes specific boxes for losses. You enter the loss figure in the trading loss box. You also complete the loss relief sections to indicate how you want to use the loss.

If you do nothing, the loss carries forward automatically. If you want to make a current year claim against total profits, you complete the relevant boxes. The return is due 12 months after the end of the accounting period. Corporation tax payment is due 9 months and 1 day after the year-end, but if there is no tax to pay, you simply file the return showing zero liability.

Your accountant will handle the CT600 filing. But it helps to understand what they are doing. The key point: do not ignore the return just because there is no tax to pay. Late filing penalties apply regardless of whether you owe tax.

Capital Allowances and Losses in Year One

One common reason new companies make a loss in year one is capital expenditure. You buy equipment, computers, tools, or a van. You can claim capital allowances on these assets. The Annual Investment Allowance (AIA) gives you 100% relief on most plant and machinery up to £1 million per year.

If you claim AIA on £30,000 of equipment, that £30,000 becomes an expense in year one. If your revenue is only £10,000, you now have a £20,000 loss. This is perfectly normal. The capital allowances accelerate the loss but do not change the underlying economics.

You can also consider not claiming full AIA in year one if you want to reduce the loss and keep profits within the 19% tax band later. This is called a capital allowances deferral claim. It is a legitimate planning technique. But it only makes sense if you expect profits in the near future and want to smooth your tax position.

For most new companies, claiming the full AIA in year one is the right move. The loss carries forward and offsets future profits. You get the tax relief eventually. But if you are close to the £50,000 small profits rate threshold, deferring some allowances can keep you in the 19% band for longer.

Losses and Director's Loan Accounts

A loss-making company often means the director has put money into the business. If you lent your company money personally, that creates a director's loan account credit balance. The company owes you money. This is separate from the tax loss.

If the company makes a loss but you have taken dividends or salary exceeding the company's retained earnings, your director's loan account goes overdrawn. That triggers a benefit in kind charge and potential Section 455 tax at 33.75% if the loan is not repaid within 9 months of the year-end.

Losses do not automatically fix an overdrawn loan account. You still need to repay the company or have the loan formally written off (which is a deemed dividend for you personally). This is a common trap for new directors who assume a loss means they can take money out tax-free. It does not work that way.

Losses and Corporation Tax Rates

Corporation tax rates for 2025/26 are 19% on profits up to £50,000 and 25% on profits above £250,000. Marginal relief applies between £50,000 and £250,000. Losses carried forward offset profits at the rate applicable in the year you use them.

This matters. If you make a loss in year one when the rate is 19% but use it in year three when profits push you into the 25% band, the loss saves you tax at 25%. That is a better outcome. Conversely, if rates fall, using losses sooner might be better. Rate changes are a factor in loss relief planning.

For most small companies, the 19% rate applies to the first £50,000 of profits. Using carried-forward losses against these profits saves 19p per £1 of loss. That is still valuable. But if you expect to grow quickly, deferring loss usage until you hit the 25% band can be worth an extra 6p per £1.

Losses and Associated Companies

If you control multiple companies, the associated company rules affect the profit thresholds for corporation tax rates. Each associated company reduces the £50,000 small profits rate band and the £250,000 upper limit by dividing them equally.

For example, if you have two associated companies, the small profits band is £25,000 each (£50,000 divided by 2). The upper limit is £125,000 each. Losses in one company can be surrendered to another under group relief rules, but that is a separate topic.

If you are a sole director of a single new company, this does not apply. But if you already have another company, tell your accountant. It affects how we plan loss usage.

Losses and R&D Tax Credits

If your new company is loss-making because of research and development activity, you may qualify for R&D tax credits. The rules changed from 1 April 2024. The merged R&D scheme applies. Loss-making companies that spend 30% or more of their total costs on R&D can use the enhanced R&D Intensive Scheme (ERIS).

Under ERIS, you can surrender the loss for a cash payment. The payable credit is 14.5% of the surrendered loss. For a new company with no profits, this is often better than carrying the loss forward. You get cash now rather than a tax reduction later.

To qualify, your R&D expenditure must meet the specific definition. It must be in a qualifying project that seeks an advance in science or technology. Software development, engineering improvements, and product innovation often qualify. But routine development or customisation does not.

If you think your loss is R&D-related, speak to us before filing the CT600. The claim must be made within 12 months of the year-end. And the additional information form (R&D AIF) must be submitted digitally.

Practical Steps for a Loss-Making New Company

Here is what you should do if your new company makes a loss in year one.

  • File the CT600 on time. Even if there is no tax to pay, late filing penalties apply. The deadline is 12 months after the year-end.
  • Decide on loss relief. Carry forward is the default. But if you have any non-trading income, make a current year claim to shelter it.
  • Check your director's loan account. If it is overdrawn, you have a tax issue separate from the loss. Address it before the 9-month deadline.
  • Consider capital allowances. Claim AIA on all qualifying assets. Or defer if it makes sense for your profit trajectory.
  • Assess R&D eligibility. If your loss comes from innovation, you may be entitled to a cash repayment.
  • Keep good records. HMRC can query loss claims. You need to show the loss is genuine and arises from trading.

If your turnover crossed the VAT threshold of £90,000 during the year, you also need to register for VAT within 30 days. That is a separate compliance issue but one that often catches new companies.

Common Mistakes to Avoid

New companies make several errors with loss relief. Here are the ones we see most often.

Not filing the CT600. Some directors assume no tax means no return. Wrong. HMRC issues penalties for late filing regardless of the tax position. File the return.

Assuming losses expire. Trading losses carried forward have no time limit. They sit in the company until used. But they can only be used against profits from the same trade. If you change the trade significantly, the losses may be restricted.

Ignoring the director's loan account. A loss does not mean you can take money out tax-free. If you do, you create a benefit in kind and potential Section 455 tax. Plan your drawings carefully.

Missing the R&D claim window. You have 12 months from the year-end to make an R&D claim. After that, it is lost. If you think you qualify, act quickly.

Overlooking associated companies. If you have multiple companies, the profit thresholds for corporation tax rates shrink. This affects how much your loss saves you.

When to Get Professional Help

Loss relief is not complicated for a simple year-one loss. But it becomes complex quickly if you have associated companies, R&D activity, capital gains, or a director's loan account. If any of these apply, speak to a qualified accountant before filing the CT600.

Our ICAEW qualified team handles loss relief claims for new companies across the UK. From a tech startup in Shoreditch to a construction company in Leeds. The rules are the same. The planning is different for each business.

If you are unsure how to handle a loss in your first year, contact us. We can review your accounts, calculate the best loss relief option, and file the CT600 correctly. Do not leave tax relief on the table.