If your self-employment makes a loss, you do not have to simply absorb it. You may be able to use that loss to reduce your PAYE income tax bill — or even get a refund from HMRC. This is called sideways loss relief, and it is one of the most underused tax reliefs available to people running a business alongside employment. Here is how it works in 2026/27.
What Is Sideways Loss Relief?
Sideways loss relief (under s64 of the Income Tax Act 2007) allows you to set a loss from your self-employment against your general income in the same tax year or the previous tax year.
General income includes:
- PAYE salary and wages
- Rental income
- Savings interest
- Dividends
- Other taxable income
The relief reduces your total income for the year — which can reduce the income tax you owe, or generate a refund if your employer already deducted PAYE.
When Does Sideways Relief Apply?
| Your situation | What you can do |
|---|---|
| Self-employment loss in 2025/26 | Offset against other income in 2025/26 |
| Self-employment loss in 2025/26 | Alternatively, offset against other income in 2024/25 |
| New business: loss in first 4 years | Early-year relief — carry back 3 years |
| Remaining loss after sideways claim | Carry forward against future self-employment profits |
You choose which year to claim. Claiming against the prior year means HMRC calculates a refund of tax already paid — which may be quicker if you want cash back. Claiming in the current year reduces the tax payable on your next Self Assessment bill.
Worked Example: Emma the Freelance Consultant
Emma works full-time as a marketing manager (PAYE, £45,000/year) and runs a freelance consulting business. In 2025/26, the consulting business makes a loss of £8,000 (revenue: £6,000; allowable expenses: £14,000).
Without loss relief:
- PAYE income: £45,000
- Tax on £45,000 (after personal allowance of £12,570): £32,430 × 20% = £6,486 income tax
With sideways loss relief:
- PAYE income: £45,000
- Less self-employment loss: −£8,000
- Adjusted total income: £37,000
- Tax on £37,000 (after personal allowance): £24,430 × 20% = £4,886 income tax
- Tax saving: £1,600 (Emma claims a £1,600 refund from HMRC via Self Assessment)
Emma’s employer deducted tax on £45,000. Emma files her Self Assessment, claims the loss, and HMRC refunds £1,600 to her bank account.
The Requirement: A Genuine Commercial Trade
HMRC will only allow sideways loss relief if the self-employment is a genuine commercial activity carried on with a view to profit. This matters because claiming tax relief against PAYE income from an activity that is really a hobby is a red flag.
Signs HMRC looks for in a genuine trade:
- Formal registration as self-employed with HMRC
- Proper business records (invoices, receipts, accounts)
- Marketing and actively seeking customers
- A credible path to profitability
- Not the same activity repeated with losses year after year
If HMRC considers the activity a hobby, they can issue an assessment denying the loss relief and charging the tax back — with interest and potentially penalties.
Restrictions on Sideways Loss Relief
The Cap
Total income tax reliefs in any one year are capped at the greater of:
- £50,000, or
- 25% of adjusted total income
For most side-business owners with small losses, this cap is not an issue. But if you have large losses and other significant reliefs (e.g. Gift Aid, pension contributions), the cap can bite.
Class 4 NI
Self-employment losses reduce your Class 4 National Insurance exposure for that year. If your self-employment profits are negative, you pay no Class 4 NI on that activity.
Loss Cannot Exceed Income
You cannot use sideways relief to create a negative income figure — the maximum relief in any year is the amount of other income available to absorb the loss. Any excess can be carried forward.
Early-Year Loss Relief for New Businesses
If your business started within the last 4 tax years, you may have access to early-year loss relief (s72 ITA 2007). This allows you to carry a loss back against general income of the 3 preceding tax years (earlier years first), rather than just the current and previous year.
This is valuable if you left employment to start a business — losses in the first years can be offset against your former PAYE income, generating a refund.
How to Claim
- Register for Self Assessment (if not already registered) and file your return
- Complete the self-employment pages showing the loss
- In the main return, claim the sideways relief in the “income” or “reliefs” section
- HMRC calculates the tax reduction or refund
The claim deadline is 12 months after the 31 January filing deadline for the loss year:
- 2025/26 loss → file by 31 January 2027 → claim sideways relief by 31 January 2028
See our Self Assessment guide, trading allowance guide, and employed or self-employed guide.