Tax Glossary


White Arrow
Last updated on:
March 17, 2024

Offsetting in the tax realm is essentially the practice of balancing due amounts against receivables. Specifically, it's about deducting what you owe against what you're owed, potentially leading to a reduced financial obligation. This method not only applies to individuals dealing with tax authorities but can also be relevant in business interactions where companies act as both suppliers and clients to each other, allowing mutual debts to be balanced.

Understanding Offsetting in Tax Matters

The concept of offsetting manifests in several ways within taxation, encompassing:

  • Capital Gains and Losses: A common scenario involves offsetting a Capital Loss against a capital gain. For instance, if you sell two assets in a year—one at a profit and another at a loss—the loss can be deducted from the profit, reducing your taxable capital gains.
  • Rental Income: Similar principles apply to rental income from multiple properties. Losses from one property can offset profits from another, potentially lowering your taxable income.
  • Carrying Losses Forward: Offsetting also allows for past losses to reduce current year profits, but this typically applies to the same income type.

A Practical Example of Offsetting

Let's consider Lena's situation. She invests in a media company and decides to sell part of her shares, netting a £30,000 profit. Later in the same year, she incurs a £16,000 loss from additional share sales. For tax purposes, Lena is allowed to offset her loss against her profit, meaning she only needs to account for £14,000 in taxable capital gains.

This offsetting means Lena effectively reduces her tax liability to the net gain after accounting for her loss: £30,000 profit - £16,000 loss = £14,000 net gain.

Tools and Calculators

For those looking to estimate their potential tax liabilities, especially regarding capital gains, there are online calculators available. These tools can provide an easy way to determine what you might owe after considering offsetting factors.

In essence, offsetting provides a way to minimize tax liabilities by allowing individuals and businesses to account for their losses against their gains, ensuring they are taxed only on their net profit or gain across various transactions.

By clicking “Accept”, you agree to the storing of cookies on your device to enhance site navigation, analyse site usage, and assist in our marketing efforts. View our Privacy Policy for more information.

Arrange your free initial consultation today.

Book Free Consultation
UK's best rated accountant 2021
Rated Excellent
5 Stars
on Trustpilot