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Offsetting trading losses against PAYE

Q: If, whilst employed and paying tax, I set up as a sole trader as well, can I offset any trading losses against the PAYE I pay through my self-assesment?

A: As long as you are genuinely in business to earn a profit then yes, you can offset your losses against current year income or against past or future profits of the trade itself.

There are some restrictions. You need to spend at least ten hours a week on the business for HMRC to accept it as genuine, and you must be trading with a view to making a profit. So, there’s no immediate scope to claim loss relief for the costs of an expensive hobby or a few failed share trades (although if you keep at it and make a profit in the future then you could use the carried forward losses then).

You can offset losses in several ways:

• Against your PAYE code for this year, to reduce in year deductions
• Against future profits of the same trade, to reduce the tax due on it in those years
• Through your self assessment return, to trigger a repayment after the year end
• Against any capital gains you make this year (if the trade loss is greater than all your other income this year)

If you want to offset against your PAYE code or previous year losses, this is done outside the tax return by writing to the HMRC including details of the trade, its loss and the way you want to claim relief. The other claims are included in your self assessment return. More details in HM Revenue & Customs Helpsheet 227.

Communicating with HMRC

I had to deal with HMRC on just this subject and I strongly recommend that you keep every shred of correspondence - photocopies are good and also use registered post where possible - because otherwise they'll lose it. It took me 6 months before they would admit the mistake and then they said they had to begin looking at the case from scratch. Utter chaos.