Do You Have To Pay Tax If You Are Running A Small Business At A Loss In The UK?

If you are wondering whether you have to pay taxes if you are running a small business at a loss in the UK, you will find the answer to your question in the following article. Additionally, we will also discuss how to claim tax relief if you are running a small business at a loss in the UK. For a deeper perspective, we will also explore the different methods of claiming tax relief; such as offsetting losses against other incomes, carrying the loss forward and claiming capital losses.

Do You Have To Pay Tax If You Are Running A Small Business At A Loss In The UK?

No, you do not have to pay tax if you are running a small business at a loss in the UK. You can carry forward the loss and offset it against future profits, up to a maximum of £50,000 or 25% of your income, whichever is greater. 

Here are the steps on how to claim tax relief for business losses in the UK:

• complete a self-assessment tax return
• enter your business income and expenses
• claim relief for any business losses
• submit your tax return to HMRC

Furthermore, it is possible to claim relief for business losses against income from other sources, such as employment or property income. To do so, you will need to include this information in your self-assessment tax return.

In order to claim tax relief for business losses you would need to:

• keep good records of your business income and expenses
• make sure you claim relief for all of your allowable expenses
• be aware of the deadlines for submitting your tax return

If you require guidance on claiming tax relief for business losses, it is advisable to consult with an accountant or tax advisor who can provide professional advice tailored to your specific situation.

How Can You Claim Tax Relief If You Are Running A Small Business At A Loss In The UK?

To effectively reduce the amount of tax you owe, there are three methods for claiming tax relief on business losses. The first one allows you to offset your business loss against other income. If you have other sources of income, you can offset your business loss against this income. This can be done for losses from any tax year, up to a maximum of three years. 

Alternatively, if you don’t have any other income to offset the loss against, you can carry it forward to future tax years. This allows you to deduct the loss from future profits, indefinitely reducing the amount of tax you have to pay. 

Another option is to claim tax relief on capital losses, which applies when selling assets that have decreased in value. This type of relief can be claimed against capital gains or against other income if there are no capital gains. To claim tax relief for a small business loss, complete a Self Assessment tax return on the GOV.UK website.

How Can You Offset A Small Business Loss Against Other Income In The UK?

If you’ve incurred a business loss, there are several ways you can offset it against other income. For example, if you are self-employed and you make a loss of £10,000 in 2023-24, you can offset it against your salary, rental income, or capital gains. 

Alternatively, if you have a salary of £20,000, you can offset £10,000 of your business loss against it. This will reduce your taxable income to £10,000, and you will only have to pay tax on £10,000 of your income. 

Similarly, if you have a rental income of £5,000, you can offset £5,000 of your business loss against it. This will reduce your taxable income to £5,000, and you will only have to pay tax on £5,000 of your income. 

If you have capital gains of £5,000, you can offset £5,000 of your business loss against it. This will reduce your taxable income to £0, and you will not have to pay any tax on your income or capital gains.

There are different methods available depending on the legal structure of your business and the nature of the losses. Here are a few options:

• If you are operating as a sole trader or in a partnership, you can use the losses incurred by your business to reduce your total taxable income for the same tax year by deducting that loss from your other income, such as employment income or rental income. This will reduce your overall tax liability.
• If your business is a sole trader or partnership, you can choose to carry the losses back to the previous tax year and offset them against your total income for that year. This can result in a tax refund if you have paid taxes in the previous year.
• If your business is a limited company, you can use the trading losses to reduce the company’s total profits in the same accounting period. This reduces the corporation tax liability of the company.

How Can You Carry Forward The Loss From A Small Business In The UK?

If you operate as a sole trader or in a partnership in the UK, you can carry forward business losses and offset them against future profits from the same trade. There is no time limit imposed for carrying forward losses in these cases. The loss can be utilized against profits in subsequent tax years until it is fully utilized. 

Here are some examples of carrying forward a business loss:

• Example 1: In the tax year 2023-24, you incur a business loss of £10,000 as a self-employed individual. Since you do not have any other income in that tax year, you cannot offset the loss against other income. However, you can carry forward the loss to future tax years.

• Example 2: In the tax year 2024-25, you make a profit of £5,000. At this point, you can deduct the £10,000 loss carried forward from 2023-24 from your profit. As a result, your taxable income will be reduced to £0, and you will not be required to pay any tax on your income.

• Example 3: In the tax year 2025-26, you make a profit of £10,000. Once again, you can deduct the £10,000 loss carried forward from 2023-24 from your profit. This will reduce your taxable income to £0, eliminating the need to pay tax on your income.

For small businesses structured as limited companies, the rules for carrying forward losses differ slightly. Here are the key considerations:

• Trading losses can be carried forward indefinitely and set off against future trading profits. They can only be used to offset profits arising from the same trade or trades with similar activities.
• Non-trading losses, such as capital losses, can generally be carried forward for up to 5 years and set off against future non-trading profits of the company.

How Can You Claim Tax Relief On Capital Losses In A Small Business In The UK?

If you experience a decrease in the value of assets that you sell, you may be eligible to claim tax relief on the resulting loss. This relief is referred to as capital loss relief. You have the option to claim capital loss relief against capital gains or against other income if you do not have any capital gains.

In situations where you do not have capital gains, you can claim capital loss relief against other income. The maximum amount you can claim for capital loss relief against other income in a single tax year is £1,000. Any excess capital loss can be carried forward and utilized in future tax years.

Here are some examples illustrating how you can claim capital loss relief:

• Example 1: You sell a share that you had purchased for £150, but you only receive £100 from the sale. As a result, you incur a capital loss of £50.

• Example 2: You sell a property that you had bought for £250,000, but you receive £200,000 from the sale. This leads to a capital loss of £50,000.

• Example 3: You sell a car that you had purchased for £1,000, but you only receive £500. Consequently, you incur a capital loss of £500.

Conclusion:

The above discussion helps to conclude that you don’t have to pay taxes if you are running a small business at a loss in the UK. Small business owners at a loss can claim tax relief by offsetting their business loss against other income, carrying it forward to future tax years or by claiming tax relief on capital losses. 

References:

What if I make a loss? | Low Incomes Tax Reform Group

Is a Business Loss Tax Deductible in the UK?

Income tax losses: What self-employed/sole traders need to know