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?
Basically, the answer is “yes, you can”. As long as you are genuinely in business to earn a profit then you can offset your losses against any current year income, or against past or future profits of the trade itself.
There are a couple of restrictions. You need to spend at least ten hours a week on the business for HMRC to accept it as being '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).
Provided the trade is real though, you can offset this year’s losses in several ways, starting with the ones that give you the benefit the quickest:
• Against your PAYE code for this year, to reduce your in year deductions
• Through your self assessment return, to trigger a repayment after the year end
• Against future profits of the same trade, to reduce the tax due on it in those years
• Against any capital gains you make this year (if the trade loss is greater than all your other income this year)
You could also carry trade losses back against earlier years’ profits of the same trade.
If you want to offset against your PAYE code or previous year losses, this is done outside the tax return by writing to the Revenue 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. There’s more detail in HM Revenue & Customs Helpsheet 227, which you can download by clicking here.
Or you could talk to your accountant, especially if you think you might have trouble with the restrictions.
See also: PAYE online for free