Using my business loss to reduce my tax bill

QUESTION: I have a small self-employment business which has made a loss for the past two tax years. I am confident that it will be profitable again in the current tax year. My only other income is investment income. Are my trading losses wasted?

ANSWER: A profitable business will pay tax on its profits each year but when times are not so good it will need to ensure that any loss relief available is claimed. This will often be of paramount importance for the cash-flow of the business.

Provided your business is run on a commercial basis with an expectation of profits then your losses can be off set against other income as follows;

1. You can use the loss in the current tax year and set it against all of your other income including income from savings. This reduces the tax that would otherwise be payable on your other income. The amount of loss relief available is restricted to the higher of 25 per cent of your taxable income in that year or £50,000.

2. You can carry the loss back to the previous tax year and set it against all of your income including income from savings. This reduces the tax due on this income, and a repayment of tax is usually generated.

3. For a new business, if the loss occurs in any of the first four years of trading you can set it against your total income of the three tax years immediately before the loss year, starting with the income of the earliest year first.

4. If you cannot use the loss in any other way, you can carry it forward and set it against profits of the same trade in a future year.

5. If your business finishes and you make a loss in your last year, you can set this against your trading profits of the previous three years, latest year first.

You have not stated the amount of investment income or if this is interest or dividends and therefore as you may be able to utilise the starting rate savings band, the personal savings allowance, the dividend allowance and your basic personal allowance which providing your income is less than £45,000 could mean no tax on at least £22,500. Therefore you should consider each of these before doing any loss claim.

I also note as you will be utilising your trade loss against non-earned income you will be offsetting against income tax only. This means you can still carry forward the loss for class 4 NIC purposes against future trade income. Therefore it is important to keep a good record of how your losses have been used.

Finally you should note that the time limit for amending a return, should you wish to carry back a loss from 2016/17 to 2015/16 is January 31 2018.

Malachy McLernon ( is a director of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

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