Cash Basis Losses for Sole Traders: Every Relief Option in 2025/26

The Rule That Changed: Cash Basis Losses Are No Longer Trapped

Before 6 April 2024, a sole trader using the cash basis had one option for a trading loss: carry it forward against future profits of the same trade. Sideways relief against other income and carry back were blocked by ITA 2007 s.74E. That section was repealed by Finance Act 2024, effective from the 2024/25 tax year, at the same time as the cash basis became the default method with no turnover limit.

So for 2025/26 the position is simple: a cash basis loss carries exactly the same relief menu as an accruals loss. The restriction is gone, and the planning options are meaningfully better.

Your options for a 2025/26 cash basis loss:

• Sideways relief (s.64 ITA 2007): set the loss against your total income of 2025/26, or of 2024/25, or both. Total income includes employment income, pension income and rental profits.
• Carry back: the same s.64 claim pointed at the previous tax year, generating a repayment of tax already paid.
• Early trade loss relief (s.72 ITA 2007): a loss in any of your first four tax years of trading can be carried back against your total income of the three preceding years, earliest year first.
• Terminal loss relief (s.89 ITA 2007): a loss in your final 12 months of trading set against profits of the same trade in the final year and the three years before it.
• Carry forward: automatic if you claim nothing else; the loss reduces your first available profits from the same trade.

Can Cash Basis Losses Be Used Against Pension Income?

Yes. Semi-retired traders with pension income feel this most. Sideways relief works against your total income, and pension income (state pension, workplace pensions, private pension drawdown) is taxable income like any other. A part-time consultant in Norwich drawing £18,000 of pension while running a trade at a £6,000 cash basis loss can set that loss against the pension income and recover tax paid through PAYE on the pension.

The same applies to employment income and rental profits. Until April 2024 this exact claim was barred for cash basis users; from 2024/25 onwards it is fully available.

The Cap: £50,000 or 25% of Income

Sideways relief and early trade loss relief are subject to the general limit on income tax reliefs in ITA 2007 s.24A. The limit is the greater of £50,000 or 25% of your adjusted total income for the year the relief is claimed against (HMRC helpsheet HS204). Adjusted total income is broadly total income plus charity payroll giving, less gross personal pension contributions.

What the cap does and does not touch:

• Capped: trade loss relief against general income (s.64), early trade loss relief (s.72), and a handful of other reliefs claimed alongside them.
• Not capped: losses set against profits of the same trade. That means carry forward relief, terminal loss relief, and the portion of a carried-back loss that covers profits of the same trade in the earlier year.

In practice most sole trader losses are nowhere near £50,000 and the cap never bites. It matters when a large loss (say a first-year loss with heavy equipment spend) meets a high other income, for example a trader in Brighton with £180,000 of employment income and a £70,000 startup loss: 25% of income is £45,000, so the cap is £50,000 and £20,000 of the loss must take another route, typically carry forward.

Worked Example: Loss Year, Then Recovery Year

Rob is a self-employed carpet fitter in Coventry, on the default cash basis, with a part-time employed job paying £26,000 a year.

2025/26 (loss year). His cash basis figures:

• Income received: £30,000
• Expenses paid: £41,500 (including a £14,000 van, deducted in full when paid under s.33A ITTOIA 2005)
• Trading loss: £11,500

Option 1: sideways relief now. Rob claims s.64 against his 2025/26 total income. Employment income £26,000 less the £11,500 loss leaves £14,500. After the £12,570 personal allowance he is taxable on £1,930, so £386 of tax. PAYE will have collected roughly £2,686 on his job ((£26,000 − £12,570) × 20%), so the claim repays about £2,300. The £11,500 loss is far below the s.24A cap. Note the relief reduces income tax only; it does not touch the NIC on his employment.

Option 2: carry forward instead. In 2026/27 the trade recovers to a £24,000 profit. The loss brought forward cuts taxable trading profit to £12,500. Because it reduces trading profit, it saves both income tax at 20% and Class 4 NIC at 6% on the £11,500: £2,300 + £690 = £2,990.

Carry forward is worth £690 more here, because relief against trading profit also relieves Class 4 NIC, while sideways relief against employment income does not. Sideways wins when you need the cash now, when future profits are uncertain, or when the carried-back or sideways year has income taxed at 40% while future profits will sit in the basic rate band. Run both before claiming; the claim, once made, quantifies how much loss is used.

How the Basis Affects the Size of the Loss

The relief rules are identical across the two bases, but the loss figure itself is not. Under the cash basis income counts when received and expenses when paid, so unpaid invoices at 5 April are not income yet, and a prepaid annual insurance bill is deductible in full when paid. Either can enlarge a cash basis loss relative to accruals. Equipment cuts the other way too: a £14,000 van is a day-one cash basis expense, where accruals routes it through capital allowances (usually reaching the same 100% via the Annual Investment Allowance). Cars are the standing exception on both bases: never a cash basis expense, relieved by capital allowances or approved mileage instead.

For the full comparison of the two methods, including who cannot use the cash basis and the transition adjustments when you switch (spread over six years by default under ITTOIA 2005 s.239A/s.239B), see our guide to cash basis vs accruals for sole traders.

Does Accruals Ever Win For Losses Now?

Not as a matter of relief rules. Since 2024/25 there is no loss relief a cash basis user is denied, so electing out of the cash basis buys you nothing on the relief side. The honest residual case is about the loss figure: if significant invoices were unpaid at the year end, accruals recognises them and shows a smaller loss or a profit, and if you carry stock the accruals matching can move the loss into a different year. Those are timing choices about how big the loss is and when it lands, not about what you can do with it. If you are choosing a basis purely because you expect losses, the choice no longer matters for relief.

Old Rule vs New Rule at a Glance

Relief for a cash basis loss	To 5 April 2024	From 6 April 2024 (2024/25 onwards)
Carry forward against same trade	Available (the only option)	Available, uncapped
Sideways against general income (s.64)	Blocked (ITA 2007 s.74E)	Available, s.24A cap applies
Carry back to the previous year (s.64)	Blocked	Available
Early trade loss relief (s.72)	Blocked	Available, s.24A cap applies
Terminal loss relief (s.89)	Blocked for the sideways element	Available against same-trade profits, uncapped
Cash basis eligibility	Opt-in, £150,000 turnover limit	Default, no turnover limit

Making the Claim

Sideways relief and carry back are claimed on your Self Assessment return, in the loss boxes of the self-employment pages (SA103), or by a standalone written claim. The deadline is the first anniversary of the 31 January filing deadline for the loss year: 31 January 2028 for a 2025/26 loss. Miss it and only carry forward remains. Early trade loss relief and terminal loss relief follow the same deadline pattern, and HMRC helpsheet HS227 walks through the computations.

Carry forward needs no claim as such, but record the figure: it goes in the loss-brought-forward box in the first profitable year, and HMRC expects continuity year to year.

Three practical points before you file:

• Keep the payment evidence. A cash basis loss stands on when money actually moved. A schedule of unpaid invoices at 5 April is your proof that the missing income genuinely was not received.
• Watch the NIC asymmetry. Relief against non-trade income saves income tax only; relief against trade profits also saves Class 4 NIC (6% in the £12,570 to £50,270 band for 2025/26).
• Loss years and the state pension. With profits below the small profits threshold (£6,845 for 2025/26), you are not treated as having paid Class 2, so a loss year can leave a gap in your NI record. Voluntary Class 2 is a cheap fix; check your record before the year drops off.

Losses Under Making Tax Digital

From April 2026, sole traders with qualifying income over £50,000 fall into MTD for Income Tax; the threshold drops to £30,000 in April 2027 and £20,000 in April 2028. Quarterly updates report income and expenses on your basis as normal; a loss simply shows as cumulative expenses exceeding income, and the relief claim is made in the final declaration for the year, exactly as on a paper computation. See our guide to the MTD ITSA April 2026 deadline for who is caught first.

Partnerships

Ordinary partnerships of individuals use the cash basis by default too, and the same relief menu applies to each partner's share of a loss. The firm's SA800 allocates the loss per the profit-sharing arrangement; each partner then chooses their own relief route on their personal return. One partner in a Plymouth design partnership can carry forward while another claims sideways against employment income; the choices are independent.

If your loss year has you weighing up whether the trade belongs in a company instead, our incorporation guide covers the trade-offs, and company losses work very differently. For help running your own numbers both ways before the claim deadline, get in touch with our team.

Related articles in Sole Trader and Self Employment

• Cash Basis vs Accruals Sole Trader
• Allowable Expenses Sole Trader Checklist