Manage loss claims for MTD for Income Tax for the 2026/27 tax year if you’re a sole trader

This article explains how sole traders can add and edit loss claims for Making Tax Digital (MTD) for Income Tax for the 2026/27 tax year using FreeAgent. It also explains how to manage brought forward losses.

To manage loss claims for the 2025/26 tax year, please follow these steps instead. If you’re a landlord, read how to manage property loss claims for MTD for Income Tax for the 2025/26 and 2026/27 tax years.

If you make a loss for tax purposes in any one year (if your allowable trading expenses plus capital allowances outweigh your business's income), you may be able to use that loss to reduce your tax bill in some way. Using a loss to reduce your tax bill is called 'loss relief'.

You may be able to set the loss against other income you've received in the same year (for example, salary from a job) and claim back tax you've already paid on that income. You may be able to carry the loss back against income from previous years or you can carry the loss forward to set against future profits from that trade.

The rules around when each kind of loss relief can be used are complex, especially as losses can be treated differently for tax and National Insurance. If you've made a loss and you're not sure how you can claim relief on it, please speak to your accountant. If you’re not currently working with an accountant, you may wish to find one through FreeAgent CoPilot.

Managing losses for 2026/27 tax year

Navigate to the ‘Taxes’ tab at the top of the screen and select ‘Income Tax’ from the drop-down menu.

Select the relevant tax year from the list.

Select the ‘Tax Adjustments’ tab.

If it’s the first year that you’re using MTD for Income Tax, you can either add brought forward losses for losses that you incurred before signing up for MTD for Income Tax, or you can carry losses back for losses you incurred in your first year of MTD that you want to apply to the previous year (outside of MTD). If it’s not your first year of using MTD for Income Tax or you’re not adding brought forward losses, you can add loss claims for the current tax year.

Managing brought forward losses

If you're moving to MTD and you had losses carried forward from your last Self Assessment return, you’ll need to add the brought forward losses to your MTD for Income Tax submission as they won’t be carried over to the new MTD system by HMRC.

To add brought forward losses, select ‘Yes’ under ‘Do you want to manage your losses or loss claims for this tax year?’ within the ‘Losses and Loss Claims’ section.

Then, select the ‘Add losses’ button.

Enter the amount of the brought forward losses you want to add in the ‘Brought forward losses' amount field.

Select ‘Create’ to add the brought forward losses.

You can edit the brought forward loss by selecting the 'Edit' button on the right, or delete the brought forward loss by selecting the ‘X’.

Managing loss claims for the 2026/27 tax year

To add a loss claim for the 2026/27 tax year, select ‘Yes’ to ‘Do you want to manage your losses or loss claims for this tax year?’ within the ‘Losses and Loss Claims’ section.

Then, select the ‘Add loss claims’ button.

Next, select which type of claim you want to add within the ‘New loss claims’ window. If you’re unsure which type of claim to choose, please speak to your accountant. If you're not currently working with an accountant, you may wish to find one through FreeAgent CoPilot.

Sole traders can choose between ‘Carry trading losses forward’, ‘Carry trading losses sideways’ and ‘Carry trading losses back’.

Carry trading losses forward

Use this if you want to carry losses from this year forward and use them against the first available profits of the same trade. This would be useful if you didn't make a profit last year and don't have any other income to set the loss against.

Please note that the losses would be used against the first available profits from that trade, even if those are below your personal allowance. For example, if you make a loss of £10,000 this year and then next year make a profit of £12,000, the £10,000 loss would be used against the £12,000 profit even though it’s below the personal allowance threshold.

Select ‘Yes’ to ‘Are you carrying trading losses forward?’.

You can enter both the ‘Current year losses’ and the ‘Previous years’ losses’ to be carried forward to offset future profits of the same trade.

Select ‘Create’ to add the loss claims.

Carry trading losses sideways

Use this if you want to take losses from this income source and set them against a different income source in the same year. This would be useful if you made a loss this year and also have other income on which you've already paid tax, such as a salary from a job, in the same year. It can also be useful if you have two trades, one loss-making and one profitable.

For example, if you have a profitable trade making £30,000 and another that lost £10,000, then you can use sideways loss relief to pay tax and Class 4 NI on the combined value of £20,000.

Select ‘Yes’ to ‘Are you carrying trading losses sideways?’.

You’ll need to enter the ‘Current year general income’, which is the amount of the current tax year’s trading losses to be offset against general income of the current tax year.

Select ‘Create’ to add the loss claims.

Carry trading losses back

You can carry back losses from the 2026/27 tax year and use them against income made in previous years using MTD for Income Tax. If you want to carry losses back from the 2025/26 tax year or earlier, you’ll have to do so using your Self Assessment return.

There are two steps to carrying a loss back using MTD for Income Tax:

1. Create the loss claim
2. Enter the reduction in tax liability due to losses carried back

1. Create the loss claim

First, select ‘Yes’ to ‘Are you carrying trading losses back?’.

You can enter the ‘Previous year general income’ and ‘Early year losses’ to be carried back and offset against general income of the previous year(s). If your business is closing, you can also enter ‘Terminal losses’ to be carried back and applied against the profits of the three previous years, starting with the latest year first.

Select ‘Create’ to add the loss claims.

2. Enter the reduction in tax liability due to losses carried back

Once you’ve added the loss claim, select ‘Yes’ to ‘Do you want to make any tax liability adjustments for this tax year?’ under the ‘Tax liability adjustments’ section.

Select ‘Add reduction in tax liability due to losses carried back’.

The figures you’ll need to enter on this page will not be supplied by FreeAgent as we aren’t given the information needed to do this by HMRC. You’ll need to independently calculate the difference between your original tax and class 4 NICs due to HMRC for the earlier year, and the revised tax due for that year after you’ve carried back your losses. You can use HMRC’s helpsheet to work out the figures to input here.

Select ‘Create’ to add the new carried back loss claim.

Set a preference order

If you’re adding loss claims to be carried both sideways and back, you can choose the order you want to claim your current tax year’s trading losses in.

You can choose the 'Preference order' to be either:

• ‘Carry Sideways’ - to put them against the rest of your current year's income first, or;
• ‘Carry Back’ - to take them back against your income from a previous year first

Select ‘Create’ to complete the process.