The effect of stress relief annealing (SRA) has been investigated on two classes of non-grain oriented (NGO) steels and with different sheet thickness. Magnetic properties were measured on mechanically sheared and water jet cut Epstein strips before and after SRA treatment at 800 °C in a nitrogen gas atmosphere. Significant improvement in power loss was achieved for the steel with lower aluminium content after SRA but the effect was much smaller for steel with the higher aluminium level, especially for thinner sheets where the SRA treatment was actually deleterious. No change in steel chemistry after SRA was found that could explain these differences. Microstructural examination showed residual dislocation substructures due to shearing before SRA and recrystallisation along the sheared edges together with recovery of the dislocation structures afterwards.A completely new finding was the presence of dislocation loops after SRA in the steel with higher aluminium content. These were not present previously but were created during the heat treatment. The presence of these dislocation loops is proposed as the reason for the weak or adverse effect of SRA on power loss. Detailed electron microscopy revealed that there are two families of dislocation loops having either Burgers’ vectors of a 〈100〉 lying on {100} planes or a√3/2 〈111〉 on {111 planes}. A model is presented whereby oxidation which occurs at the sheet surfaces causes a concentration gradient within which the Al atoms diffuse. This process necessitates a balancing flux of vacancies diffusing into the interior. When the content of vacancies exceeds the equilibrium content they agglomerate and ‘precipitate’ out as vacancy dislocation loops.