A trading loss is a cash setback in the year it arises, but it is not a wasted figure for tax purposes. UK corporation tax law allows a loss to be set against profits in several ways: against profits of the same period, carried back against the previous twelve months, carried forward against future profits, surrendered to other companies in the same group, or used as terminal loss relief when the trade ceases. The choice of route is rarely automatic and the wrong choice can lock value into a slow drip-feed when a faster repayment was available, or vice versa. Understanding the menu is the first step in turning a loss into a planned tax outcome rather than an accident.
This piece is part of the corporation tax and year-end accounts hub. It pairs with the director's loan account and section 455 spoke, because a loss-making company often still has DLA exposure that needs separate management, and with the micro-entity FRS 105 simplified reporting spoke, because FRS 105 does not show a deferred tax asset for the future use of losses even where one would be sensible. Read this one for the loss reliefs themselves.
What counts as a trading loss
A trading loss for corporation tax purposes is the tax-adjusted result of the company's trade for the accounting period, after capital allowances, where that result is negative. It is not the same as an accounting loss. Disallowed expenses are added back. Capital allowances are claimed in place of depreciation. Adjustments for things like client entertaining, legal costs of capital nature and certain provisions can change the figure. A company whose accounts show a small loss can have a larger tax loss after adjustments, or in some cases a profit.
Set against profits of the same period first
A current-period trading loss can be set against the company's total profits of the same period before any carry forward or carry back is considered. Total profits include trading profits of any other trade carried on, property income, interest income and chargeable gains. This same-period set-off is automatic to the extent that it produces an in-year saving, although the company can choose not to use it where doing so would waste, for example, a relief against capital gains that has its own value.
Carry back twelve months
Section 37 of the Corporation Tax Act 2010 allows a trading loss to be carried back against the total profits of the immediately preceding twelve months, generating a corporation tax refund for the earlier period. The carry back is a single twelve-month window, not three years as for certain extended carry-back rules that have applied at various points. The carry back must be claimed; it does not happen automatically. For a company that paid corporation tax last year and then made a loss this year, this is the fastest route to cash, because the earlier year's tax has already been paid and is repaid by HMRC once the claim is processed.
Carry forward against future profits
Trading losses not used in the current period or carried back are carried forward. For losses arising in periods beginning on or after 1 April 2017, the carry forward rules under section 45A allow the loss to be set against the total profits of future periods, not just future profits of the same trade. The pre-2017 regime under section 45 restricted carry-forward to future profits of the same trade and continues to apply to losses generated under that regime. For most ongoing companies the post-2017 rules are the operative regime, and they give the company useful flexibility to absorb the loss against whatever profits arise.
The post-2017 deduction cap
The broader carry-forward rules come with a restriction. A company can use brought-forward losses to relieve only 50% of its profits above an annual £5 million deductions allowance. Profits up to the £5 million allowance can be fully relieved; above that, only half. The £5 million allowance is shared across groups. For the typical SME, profits never reach the £5 million threshold and the restriction is irrelevant. For a larger company or a fast-growing group, the cap can stretch the use of an old loss across several years rather than concentrating it in one.
Group relief
Where a company is in a 75% group, current-period losses can be surrendered to another group company to set against that company's profits of the same period. Brought-forward losses arising under the post-2017 rules can also be surrendered to a fellow group company under a separate group relief mechanism, subject to additional restrictions. Group relief turns one company's loss into another company's tax saving without the need to wait for the loss-making company itself to return to profit, which is particularly useful in groups that hold one loss-making trade alongside a profitable one.
Terminal loss relief on cessation
When a trade ceases, a special relief applies to the final twelve months of trading. A terminal loss can be carried back three years against profits of the same trade, not just the standard one year. The relief is found in section 39 of the Corporation Tax Act 2010 and is intended to recognise that a company on cessation has no future against which to use the loss. The relief is claimed on the final return and can generate a refund of corporation tax paid in the three preceding years.
Choosing between carry back and carry forward
The choice between carrying a loss back and carrying it forward is rarely neutral. Carry back delivers cash now via a refund. Carry forward defers the saving but can deliver it at a higher rate if future profits sit in the marginal corporation tax band where the effective rate is higher than the rate in the carry-back year. For a company that paid the small profits rate of 19% in the prior year and expects to be in the marginal band at 26.5% next year, carry forward may produce a larger absolute saving even though it arrives later. The framework for those rates is covered in the 25% main rate and 19% small profits rate spoke and the marginal relief calculation spoke.
A simple comparison example
A company has a £40,000 trading loss in 2026-27. The prior year produced £30,000 of profit taxed at 19%. The company expects £150,000 of profit in 2027-28, which falls in the marginal band at an effective rate around 24%. Carrying back £30,000 of the loss against the prior year produces a refund of 19% of £30,000, which is £5,700, with the remaining £10,000 carried forward. Carrying the full £40,000 forward against 2027-28 profit saves at the marginal effective rate on those profits, which produces a larger absolute corporation tax saving but delays the benefit by a year. The right choice depends on cash needs and on confidence in the future profit forecast.
Loss claims must be made within strict time limits
A carry-back claim under section 37 must generally be made within two years of the end of the loss-making accounting period. Carry-forward losses arising from prior periods can be used in later returns within the normal corporation tax assessment window, but the original loss claim must be filed within the time limits. Missing the deadline can lock the company into a single route or, in some cases, waste the loss entirely. Filing the CT600 within the standard twelve-month window protects the option to use the loss flexibly.
Non-trading losses
Trading losses are not the only kind of loss a company can have. Non-trading loan relationship deficits, surplus management expenses, property losses, and capital losses each have their own rules. Property losses arising in the UK can be carried forward against future UK property profits, with limited current-period use. Capital losses can only be set against capital gains, not against income. Non-trading loan relationship deficits have their own carry-back and carry-forward rules. Each of these is technical enough to warrant a separate piece, and a company with a mixed loss profile should not assume the trading loss reliefs apply across the board.
Common errors with loss relief
- Missing the two-year carry-back claim window and losing the option to take a refund of prior-year tax.
- Treating a pre-2017 loss as if the broad post-2017 carry-forward rules apply, when the older same-trade restriction still binds.
- Forgetting the £5 million deductions allowance and the 50% cap on use of brought-forward losses above it, in a larger company.
- Surrendering a current-period loss as group relief where a carry-back would have produced a faster refund at a higher rate.
- Failing to claim terminal loss relief on cessation, leaving final-period losses unused.
Documentation and the tax computation
A loss claim is supported by the tax computation attached to the CT600. The computation shows the trading result for the period, the adjustments to arrive at the tax-adjusted figure, the choice of route used for the loss, and the carry-forward balance to be brought forward into the next period. Keeping the loss memorandum up to date year on year is critical, because HMRC will look at the running balance when reviewing future claims. A company that loses track of the unused carry-forward figure can struggle to evidence the claim years later when the loss is finally used.
Frequently asked questions
Can a sole trader use these rules?
No. The loss reliefs described here are the corporation tax reliefs for companies. Sole traders use the income tax loss reliefs in the Income Tax Act 2007, which have a similar structure but different mechanics and different time limits. Owners running through a limited company use the company rules; owners trading personally use the income tax rules.
How long can a loss be carried forward?
There is no time limit on the carry forward of a corporation tax trading loss. A loss arising in 2026-27 can sit on the company's tax memorandum indefinitely until profits are available to absorb it, subject only to the deduction cap for the largest companies and to specific anti-avoidance rules around a change in ownership of the company combined with a change in the nature of the trade.
Does a loss-making year mean no CT600 is needed?
No. A company must file a CT600 for every accounting period, including one that shows a loss. Filing the return is what records the loss formally and preserves the carry-forward balance. A company that fails to file a CT600 for a loss-making year can find HMRC unwilling to accept the loss carry-forward in a later return.