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December 11, 2025
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Using Losses to Reduce Your Corporation Tax Bill
According to HMRC’s Corporation Tax statistics, over 1.6 million UK companies had no Corporation Tax liability in 2023–24. This represents around 51% of UK companies. There are several reasons why a company may have no Corporation Tax to pay. One of these is making a loss.
If your business has had a tough year, that loss does not necessarily need to go unused. Depending on the circumstances, it may reduce the tax you owe for the current year, be carried back against profits from an earlier year or be carried forward to offset future profits.
Trading losses happen when your costs are higher than your profits. No business wants this outcome. But once it happens, corporation tax losses can still work in your favour. This guide explains exactly how you can work out your losses, using clear examples throughout.
Key Information
- A corporation tax loss can be set against profits from other years, or against profits made by other companies in the same group
- You do not pay corporation tax on a loss, but you must still calculate and report it correctly
- Losses can be carried back 12 months, carried forward indefinitely, or used through group relief
- Since April 2017, losses above £5 million can only offset 50 per cent of remaining profits, not the correct figure previously misquoted elsewhere online
- Getting the calculation right from the start avoids delays to your corporation tax refund on losses.
What Are Corporation Tax Losses?
Corporation tax losses occur when a company’s allowable costs exceed its taxable profits in an accounting period. You might ask, do you pay corporate tax on losses? The answer is no. But that does not mean losses are ignored. HMRC allows you to use them for relief, adjusting them against profits from other periods or other group companies.Tax expert Daniel Drebler has explained this well. He noted that while profits are taxed, no immediate refund is granted simply because a corporation reports a loss. Instead, the loss can only offset profits made in other periods or by related companies. He also pointed out that the rules for using losses vary widely between countries, though most allow losses to be carried forward.
Are You Eligible for Corporation Tax Losses Relief?
In order to claim relief, your company must have paid corporation tax on profits at some point and then suffered a loss in the current accounting year. Even if your business has closed down, the losses made just before stopping the operations can count. This is commonly called terminal loss relief. This one works slightly differently from an ongoing trading loss.
Pro Tip:
Even in a loss-making year, keep detailed records of income and expenses. Clean records make it far easier to claim a refund on corporation tax losses later, whether that is this year or several years from now.
How to Calculate Your Corporation Tax Losses?
Before claiming anything, you need an accurate figure for your loss. This starts with your company’s profit and loss statement. It should be adjusted using HMRC’s rules to reflect what is actually tax-deductible. Below mentioned are the ways you can use to calculate your corporation tax losses:
1. Capital Allowances
Capital allowances are tax reliefs for buying business assets such as machinery, equipment and vehicles. In your tax calculation, these allowances replace depreciation. Since depreciation is not allowed for tax purposes, using capital allowances instead tends to increase the size of your tax loss.
2. Balancing Charges
A balancing charge arises when you sell an asset for more than its tax write-down value, though still less than what you originally paid. This amount counts as taxable profit and must be added back. Balancing charges reduce your tax loss since the gain is treated as income.
3. Trade Charges
Trade charges include certain insurance premiums, payments into registered pension schemes and qualifying charitable donations. These count as allowable expenses so they increase your tax loss. They can also be carried back to a previous accounting period to help generate a corporation tax refund on losses.
4. What Not to Include
A few items must stay out of your corporation tax losses calculation entirely.
- Capital gains or losses: Profits or losses from selling fixed assets such as land, buildings, or shares fall under separate chargeable gains rules.
- Non-trade income or expenses: Investment income, fines and penalties are not linked to trading, so they do not belong in this calculation.
- Disallowed expenses: Costs such as client entertainment or excessive director pay are not tax-deductible and must be added back.
How to Use Corporation Tax Losses?
Once your loss figure is confirmed, you have several ways to use it. Which one suits you best depends on your company’s situation. It includes whether profits are expected soon, whether you are part of a group or whether the business has stopped trading. Following are the ways you can use your corporation tax losses:
1. In-Year Relief
The simplest option. Your loss is set against other profits made in the same accounting period, such as investment income or chargeable gains.2. Carrying a Loss Back
You can carry a loss back 12 months and set it against profits from that earlier period. This is not necessarily a full accounting year. It often leads to a faster corporation tax refund on losses since tax already paid may be repaid.3. Carrying a Loss Forward
Losses that are not used straight away can be carried forward and set against profits in future years. Since April 2017, forward losses can be used more flexibly against total profits rather than only profits from the same trade.
Did You Know?
There is no time limit on how long a corporation tax loss can be carried forward. In theory, a loss made decades ago could still be used today, as long as the company has kept trading and the loss has never been claimed elsewhere.
4. Group Relief
If your company is part of a group, meaning one company owns at least 75 per cent of another, losses can be surrendered to another group company. That company then uses the loss to reduce its own tax bill.5. Cessation (Terminal) Loss Relief
If your company stops trading, losses from the final 12 months can be offset against profits from the three years before that. The trade must be the same as before and if accounting periods do not line up neatly, only the portion of profit that falls within those three years counts.6. Property Income Losses
Companies earning income from renting out property can offset a property loss against other profits made in the same year, such as trading profits. These losses can also be surrendered to another group company, but only if the loss is larger than that company’s own profit. Property losses cannot be carried back.7. Capital Losses
Capital losses arise when a company sells an asset for less than it paid. These cannot be used against trading profits. Instead, they can only offset capital gains made in the same year, or be carried forward if gains that year are not large enough.8. Losses for New Businesses
New companies get slightly more flexibility. If a loss occurs within the first four years of trading, it can be claimed against profits from the first three years, giving new businesses more breathing room while they get established.What Is the £5 Million Restriction?
Before April 2017, companies could use the whole of their corporation tax losses to offset profits, with no cap. That changed. Since 1 April 2017, restrictions apply once losses carried forward pass a certain size.
The rule works like this. Every company, or group of companies, gets a deduction allowance of £5 million per year. Profits up to that amount can be fully covered by carried-forward losses. Above £5 million, only 50 per cent of the remaining profit can be offset by those losses. Groups share a single £5 million allowance between them, which they can allocate however they choose.
Case Study: How a Loss Carry Back Claim Turned a Tough Year into a Cash Refund
Innovate Ltd is a UK based company which had a strong first year, making £100,000 in profit. It paid £37,500 in corporation tax at the 25% rate. The next year the market shifted and the company made a £30,000 loss.
Instead of carrying the loss forward, Innovate Ltd claimed it back against the previous year’s profit. This lowered Year 1’s profit to £70,000. At the same 25% rate this meant a revised tax bill of £17,500.
Innovate Ltd had already paid £37,500 for that year. HMRC paid back the difference. That’s a £20,000 cash refund straight into the company’s bank account.
This is exactly the point made throughout this guide. Corporation tax losses doesn’t need to sit unused. Used the right way through carry back relief it can turn a hard year into fast, debt-free cash. That cash can help cover payroll fund operations or support the business through recovery.
Conclusion
A loss may sound like everything negative. But corporation tax losses are not the setback they might first appear to be. If calculated correctly, they open up several ways to reduce your tax bill, whether through in-year relief, carrying losses back or forward, group relief or terminal loss relief on cessation. Getting the calculation right at the start makes every later step far more straightforward.
If you would like support working through your own losses, our team at Sterling Cooper Consultants can help
Do not let your losses go to waste.
Contact Sterling Cooper Consultants today and our expert accountants will help you make the most of your corporation tax losses.
FAQs
No. A loss does not create a corporation tax bill on its own. Instead, it can be used to reduce tax owed in another period, either through carry-back, carry-forward, or group relief.
Trading losses can generally be carried back 12 months. Terminal losses on cessation can be carried back up to three years.
Yes. Carry-back claims must generally be made within two years of the end of the accounting period in which the loss occurred.
It is the amount of profit that can be fully covered by carried-forward losses each year without restriction. Above this threshold, only 50 per cent of remaining profit can be offset by those losses.
Yes. Losses made within the first four years of trading can be claimed against profits from the first three years, giving new companies more flexibility than established ones.
Claims are made through your CT600 form, either by amending a return already submitted, filing a new one, or writing to HMRC directly, depending on the accounting period involved.
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