Are business loans tax deductible?

When you take out a business loan, it’s easy to focus on the monthly repayments leaving your account. But at tax time, many directors are surprised to find that HMRC doesn’t treat that entire payment as a deductible expense.

While you can’t claim the whole loan as an expense, you could claim back the interest and certain fees – as long as the loan’s used wholly and exclusively for business purposes.

In this article, we’ll explain in detail which parts of your loan are tax-deductible, how they interact with capital allowances, and how to claim these deductions – so you keep more of what you earn.

What is a business loan?

A business loan is money borrowed from a bank, lender, or even the government to fund your business’s activities.

Loans can be:

• Secured, backed by assets like property or equipment

• Unsecured, where you don’t put down collateral

• Government-backed, like Start Up Loans for early-stage businesses

When you take out a loan, the amount appears as a liability on your balance sheet, rather than income, because you have to repay it, plus interest, over time.

Is a business loan treated as income?

Business loans aren’t typically treated as income. The principal amount (the money you borrow) isn’t taxable income in the UK because it’s capital, not revenue. So it doesn’t increase your taxable profit.

However, if part of the loan is forgiven or written off, HMRC may treat that cancelled debt as taxable income. For example, if a lender agrees to write off £5,000 of your loan, you might owe tax on that £5,000.

Is a business loan tax deductible in the UK?

In the UK, you can deduct several aspects of a business loan, including:

• Interest on the loan

• Arrangement fees

• Legal costs

• Other finance-related charges

So while you can’t claim the loan capital as a business expense, you can reduce your taxable profit by deducting the interest and eligible fees. You’ll just want to keep clear records to prove the loan was for business use.

Are director’s loans tax deductible?

Director’s loans (money a director borrows from their own company) are a little more complex.

• Interest paid by the company on a director’s loan may be deductible, but only if it meets HMRC’s “wholly and exclusively” rule.

• If the director owes the company over £10,000 and the loan isn’t repaid within nine months and one day after the accounting year-end, the company must pay a Section 455 tax charge of 33.75% on the outstanding amount. This is a temporary tax, repaid once the loan’s cleared or written off.

• If the company charges the director interest, that interest is taxable – both as company income (corporation tax) and as personal income for the director (reported on their Self Assessment).

Are business loans tax-deductible for sole traders?

Sole traders can’t deduct the loan amount itself, but interest and eligible borrowing costs are usually deductible under income tax rules.

You can typically claim:

• Interest on business loans and overdrafts

• Arrangement fees and other borrowing costs (if wholly and exclusively for business)

Note: If you use cash-basis accounting, there’s no £500 cap on deductible interest for most business loans. But you should check the latest rules for your specific type of finance.

What elements of business loans are tax deductible?

HMRC allows deductions for revenue‑type finance costs (eg interest, arrangement fees, and certain legal or professional costs) but not for the repayment of capital.

If your loan funds the purchase of qualifying business assets, like machinery or equipment, you may also be able to claim capital allowances on those assets, in addition to deducting the interest and finance‑related costs.

Business loans and capital allowances

Capital allowances are a type of tax relief you can claim on certain business assets, like machinery, vehicles, or equipment. Business loans themselves don’t qualify for capital allowances, but the assets you buy with the loan often do.

The main types of capital allowance include:

• Annual Investment Allowance (AIA): Lets you deduct the full cost of most plant and machinery (up to £1 million per year) in the year you buy it

• First-year allowances: Offer 100% tax relief on certain new and unused assets, like energy-efficient equipment

• Writing-down allowances: Let you claim a percentage of the asset’s cost each year if it doesn’t qualify for AIA or first-year allowances

The combination of deductible loan interest plus capital allowances on the asset can make financing business purchases much more tax‑efficient. Just make sure the asset meets the relevant allowance criteria and that you keep clear records to support your claim.

How to claim tax deductions on a business loan

The process of claiming tax deductions for your business loan depends on whether you’re a limited company or a sole trader/partnership. In both cases, you’ll need to record interest and eligible fees as business expenses.

Limited companies

• Record the interest: Add the loan interest as a finance expense in your profit-and-loss account. This reduces your taxable profit before corporation tax is calculated.

• Include it in your CT600: When you file your corporation tax return (CT600), the interest is already reflected in your accounts. So you don’t need to make a separate claim – just make sure your figures match.

• Handle arrangement fees: You can either expense them upfront in the year you pay them, or spread the cost over the loan term by treating the fee as a long-term asset and deducting a portion each year.

• Keep supporting documents: Hold onto your loan agreement, bank statements, and fee invoices as HMRC may ask to see them.

Sole traders and partnerships

• Enter expenses in your self-assessment: Include loan interest and eligible fees in your SA103 tax return, under ‘finance costs’.

• Deduct from your turnover: These costs reduce your taxable profit, so you’ll pay less income tax. If you use cash‑basis accounting, claim the interest and fees in the year you actually pay them.

• Save your records: Keep bank statements, loan agreements, and receipts in case HMRC checks your return.

What documentation is needed to claim tax deductions on a business loan?

HMRC may ask for:

• Loan agreement (shows the terms, interest rate, and purpose of the loan)

• Bank statements (proves the drawdown and payment of interest and fees)

• Invoices and receipts (links the loan to business‑related spending, such as asset purchases or professional services)

• Board minutes (for limited companies, documenting the decision to take the loan and its business purpose)

If you’re running a limited company, you’ll need to keep records for five years. If you���re self-employed, you’ll need to keep them for six years.

When might you have to pay tax on a business loan?

You don’t pay tax just for borrowing money. But tax can arise in these situations:

• Debt forgiveness: If a lender writes off part of your loan, the cancelled amount may be taxed as income

• Director’s loans: If you owe your company money and don’t repay it within nine months and one day after your accounting year‑end, your company may face a Section 455 tax charge of 33.75% on the outstanding balance

• Personal use: If you use a business loan for personal expenses (eg a car or holiday), HMRC may disallow the interest deduction for that portion

• Lending to others: If your business lends money and charges interest, that interest is treated as taxable income for the business, and may be subject to corporation tax

• Fees: Legal or arrangement fees may include VAT, but you can usually reclaim this if your business is VAT-registered and the fees are for business purposes

To avoid paying more tax than you need to:

• Use loans only for business purposes

• Repay director’s loans on time

• Check with an accountant if you’re unsure

Keeping personal and business loans separate

Mixing personal and business borrowing can make managing your taxes more complicated and weaken your limited‑liability protection – potentially exposing you to personal financial risk.

To protect yourself:

• Use a dedicated business bank account for all loan transactions, so there's a clear paper trail

• Avoid using business loans for personal expenses such as holidays or home improvements, as HMRC is likely to disallow any interest deductions related to those amounts

• Keep records of all loan agreements, invoices, and bank statements so you can provide evidence that the borrowing was used for business purposes if HMRC ever asks for it

Wrapping up

Taking care of the bottom line matters when you’re running a business – and that’s why it’s natural to wonder whether business loans can help reduce your tax bill. The good news is that while the loan itself isn’t tax-deductible, there are still ways to reduce what you owe.

Here’s a reminder of the key points:

• Interest and fees on business loans are usually tax-deductible, as long as the loan’s used wholly and exclusively for business

• Director’s loans have special rules – interest may be deductible, but late repayments can trigger extra tax charges

• Keep clear records of how you use the loan, particularly if you’re claiming capital allowances on assets you buy

• Separate personal and business finances to avoid complications with HMRC and protect your limited liability

• If you’re unsure, consult an accountant – helpful for complex areas like director’s loans or mixed-use borrowing

FAQs

Can I pay my tax bill with a business loan?

Yes, you can use a loan to pay corporation tax, VAT, or income tax. If the tax relates to business profits, the loan interest is also usually deductible. Alternatively, you may be able to set up a Time To Pay arrangement with HMRC to spread the cost without borrowing. You can also explore Tide’s VAT loans to convert large VAT bills into manageable monthly payments.

Are business loans liable for VAT?

No, loans and interest are VAT-exempt. But legal or arrangement fees may include VAT if the provider is VAT-registered. You can usually reclaim this VAT if your business is registered and the fees are for business purposes.

What’s the difference between the tax treatment of debt and equity financing?

With debt financing (like business loans), you can usually deduct interest and fees, reducing your taxable profit. With equity financing (selling shares), there’s no interest to deduct, but you also don’t have to repay investors if your business struggles. For a more detailed comparison, read Tide’s guide to debt vs. equity financing.

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