How to offset losses against PAYE as a sole trader

If, while employed and paying tax, I also set up as a sole trader, can I offset any trading losses against the PAYE I pay through my self-assessment?

Basically, the answer is “yes, you can”. As long as you are genuinely in business to earn a profit then you can offset your losses against any current year income, or against past or future profits of the trade itself.

There are a couple of restrictions. You need to spend at least ten hours a week on the business for HMRC to accept it as being ‘genuine’ and you must be trading with a view to making a profit, under the Income Tax Act 2007, s66. So, there’s no immediate scope to claim loss relief for the costs of an expensive hobby or a few failed share trades (although if you keep at it and make a profit in the future then you could use the carried forward losses then).

HMRC are now more likely to challenge businesses if they don’t post a profit within the first five years of operation, although this time frame differs in various sectors (agriculture is longer due to high start-up costs). Make sure you have a solid business plan to show HMRC if they ask you about the commercial potential of your business.

Business plan

Provided the trade is real though, you can offset this year’s losses in several ways, starting with the ones that give you the quickest benefit:

  • Against your PAYE code for this year, to reduce your in-year deductions
  • Through your self-assessment return, to trigger a repayment after the year-end
  • Against future profits of the same trade, to reduce the tax due on it in those years
  • Against any capital gains you make this year (if the trade loss is greater than all your other income this year)

You could also carry trade losses back against earlier years’ profits of the same trade.

If you want to offset against your PAYE code or previous year losses, this is done outside the tax return by writing to the Revenue including details of the trade, its loss and the way you want to claim relief. The other claims are included in your self-assessment return. There’s more detail in HM Revenue & Customs Helpsheet 227, which you can find here.

Or you could talk to your accountant, especially if you think you might have trouble with the restrictions.

Watch the below video which explains how to offset losses in your small business

Michael Somerville

Michael Somerville

Michael was senior reporter for and from 2018 to 2019.

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Tax & Vat

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