A PwC Consumer Sentiment Survey published this morning puts a number on what many small business owners have been feeling for months. Eight in 10 UK consumers are now planning to cut their spending in the next three months. Consumer confidence has fallen to its lowest level since autumn 2023, dropping sharply from minus 1 to minus 13 in a single quarter. Two in five consumers say they plan simply to buy less. A similar proportion say they will eat out less or trade down to cheaper brands.
For anyone who runs a business that depends on consumer spending, this matters. Restaurants, cafes, retail shops, personal services, tradespeople working for residential customers, freelancers selling to individuals rather than businesses. If your clients or customers are households, the next quarter is going to be harder than the last.
But falling revenue does not mean you lose control of your tax position. In fact, a tough trading year is exactly when good tax planning pays off most. This guide explains what the tax system allows you to do when income falls, how to protect your cash flow, and what mistakes to avoid when things get tight.
What Happens to Your Tax Bill When Revenue Falls?
The tax system is profit-based, not revenue-based. If your turnover falls, your tax bill falls with it, provided your costs have not risen by more than your revenue has dropped.
For sole traders, lower profit means lower income tax and lower Class 4 National Insurance. For limited companies, lower profit means lower Corporation Tax. This is the natural buffer built into the system.
But the timing of when that relief arrives matters. If you paid large payments on account in January and July 2026, based on last year’s higher income, and this year turns out to be significantly lower, you may end up with an overpayment sitting with HMRC that is only returned when you file your return.
What to do right now if your income is falling:
You can apply to reduce your payments on account at any point before the payment deadline. If your July 2026 payment on account was set based on a strong 2024/25, but 2025/26 has been much weaker, apply online through your HMRC account to reduce the July payment to reflect your actual expected liability.
This is one of the most immediate cash flow wins available to self-employed people in a tough trading year. Keeping money in your business rather than sending it to HMRC and waiting for a repayment several months later is a straightforward improvement to your working capital.
Trading Losses – What Can You Do with Them?
If a tough year turns into a trading loss, the tax system provides specific relief. How you use that relief depends on your business structure.
Sole traders with a trading loss:
You can set the loss against other income in the same tax year. If you have a salary from employment, rental income, or any other taxable income in the same year, a trading loss can be used to reduce that income, potentially generating a tax refund.
You can carry the loss back to the previous tax year and reclaim the tax paid on profits in that year. This is particularly valuable if 2025/26 is a loss year but 2024/25 was a profitable one. You file your 2025/26 return, declare the loss, and elect to carry it back. HMRC then refunds the tax you paid for the prior year.
You can carry the loss forward indefinitely against future profits from the same trade.
Limited companies with a trading loss:
A company can carry losses back against the previous 12 months of Corporation Tax profits, generating a repayment from HMRC. Losses can also be carried forward against future profits with no time limit.
If your company has made a profit in 2024/25 and is likely to make a loss in 2025/26, filing the Corporation Tax return for 2025/26 as soon as possible after the year end will trigger the carry-back claim and get the repayment moving faster.
Cash Flow – The Gap Between Tax Timing and Business Reality
One of the biggest challenges for small businesses in a tough period is the mismatch between when they earn money (or stop earning it) and when HMRC calculates and collects their tax.
Self-employed individuals on Self Assessment pay their tax up to 20 months after earning the income. This means a very good year is followed by a very large tax bill. Conversely, a very bad year generates relief that arrives many months after the difficulty has passed.
Practical steps to manage this:
Set aside a fixed percentage of every payment you receive throughout the year, regardless of what is happening to your revenue. 20% to 25% is the right range for most basic rate taxpayers. 30% or more for higher rate taxpayers.
Contact your bank early if cash flow is becoming a serious concern. Working capital facilities, invoice financing, and revolving credit facilities are far easier to arrange when you approach the bank from a position of control rather than crisis.
If your tax bill arrives and you cannot pay, contact HMRC immediately and ask for a Time to Pay arrangement before the deadline, not after. HMRC is significantly more accommodating when you call before the due date than when you call weeks later having already missed it.
VAT and Falling Revenue
If your turnover has been falling for the past year, your VAT position may also need a review.
If your taxable turnover drops and stays below £88,000 on a rolling 12-month basis, you may be eligible to deregister from VAT. Deregistering removes the administrative burden of quarterly returns but also means you can no longer reclaim VAT on purchases. Whether deregistration makes financial sense depends on the balance between your sales VAT collected and your purchase VAT reclaimed. This needs a specific calculation rather than a general rule.
If you are VAT registered and experiencing cash flow difficulties, consider switching from quarterly to monthly VAT returns. Monthly returns allow you to reclaim input VAT (on purchases) faster, which can improve your cash position meaningfully if you have significant input costs.
What Not to Do When Revenue Falls
This is as important as knowing what to do.
Do not stop filing. If your income falls and you no longer owe any tax, you still need to file your Self Assessment return or Corporation Tax return on time. Penalties for late filing apply regardless of whether tax is owed. HMRC does not waive the filing obligation just because you owe nothing.
Do not assume losses are automatically claimed. Tax losses must be actively claimed on your return. They do not apply automatically. If you have made a trading loss and want to carry it back against the previous year’s profits, you must make the election when filing. Missing this costs you a real cash refund.
Do not delay telling your accountant about a difficult year. The earlier we know, the more options are available. Telling your accountant in March that the year ending April was a disaster means there is very little time to act. Telling us in October gives us six months to plan your position before the year closes.
A Real-Life Example
Client B ran a small beauty and wellness studio in Wembley. Her revenue dropped significantly between early 2025 and early 2026 as consumer spending tightened. Her 2024/25 had been her best year, with profits of around £48,000. Her 2025/26 was tracking at closer to £28,000 when she came to us in January 2026.
She had made a January payment on account of £3,400 based on her strong prior year. Her July payment on account was also set at £3,400.
We immediately applied to reduce her July payment on account to £1,200, reflecting her lower expected 2025/26 liability. That kept £2,200 in her business rather than with HMRC during a month where cash was already tight.
We also reviewed her VAT position. She had been on quarterly returns. We switched her to monthly returns, which accelerated the reclaim of input VAT she was paying on stock and treatment supplies. This improved her monthly cash position by approximately £400 per month during the quiet period.
When her return was eventually filed, she received a small repayment for the overpaid January payment on account. Not a windfall, but real money back at a time when it mattered.
Frequently Asked Questions
If my income falls below the personal allowance, do I still need to file? If HMRC has you registered for Self Assessment, you must file your return even if your income is below the personal allowance and no tax is owed. Filing a nil return is simple but required.
Can I claim back tax already paid if this year is a loss? Yes. If you are a sole trader with a trading loss in 2025/26, you can carry it back against 2024/25 profits and reclaim some or all of the tax you paid for that year. This is done through your 2025/26 Self Assessment return.
My limited company revenue has fallen sharply. Should I stop paying myself a dividend? Not necessarily, but you do need to check that there are sufficient retained profits in the company to justify the dividend legally. Paying a dividend from a company that is in loss is a prohibited distribution. Your accountant needs to check the numbers before any dividend is declared.
Consumer confidence at a three-year low is a reminder that tax planning is not just for profitable years. The tax system has specific tools to help businesses through difficult periods. Whether it is a loss carry-back, a payment on account reduction, a VAT return frequency change, or simply an earlier conversation with your accountant, acting sooner is almost always better than waiting.
Call Talha on 07478 645331, email info@yourtaxhelp.co.uk, or visit yourtaxhelp.co.uk.
Book your free 15-minute call: calendly.com/yourtaxhelp/15min
General guidance only. Not personal tax advice. Figures are for 2026/27.
