Is Business Loan Interest Tax Deductible UK?
Kyrelos Khir
Manager · Sep 29, 2024 · 6 min read
Yes, interest paid on a UK business loan is generally deductible as a business expense, reducing your taxable profits and therefore your corporation tax or income tax liability. Capital repayments are not tax-deductible. Here is how the tax treatment works in practice.
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Interest deductibility: the rules
Under UK tax law, interest paid on borrowings that are wholly and exclusively for business purposes is deductible against taxable profits. This applies to: interest on business loans, overdraft interest, invoice finance discount charges, and interest on asset finance facilities. The deduction reduces your pre-tax profit, which in turn reduces the corporation tax you owe.
For a limited company paying corporation tax at 25% (the main rate from April 2023), every £1,000 of deductible interest saves £250 in corporation tax. For a sole trader in the higher rate tax band, the saving is £400 per £1,000 of interest. The effective after-tax cost of borrowing is meaningfully lower than the headline rate as a result.
Capital repayments, arrangement fees and lease payments
Capital repayments on a business loan are not tax-deductible. You are repaying the principal you borrowed, which is not an expense. Only the interest element of each monthly payment reduces your taxable profit. Most loan agreements provide an amortisation schedule showing how much of each payment is interest and how much is capital.
Arrangement fees are generally deductible either as an upfront expense or amortised over the loan term, depending on the nature of the fee and your accounting policy. Finance lease rentals (including both the interest and capital element) are fully deductible as a business expense under finance lease accounting. Hire purchase allows capital allowances on the asset value rather than deducting the repayments directly.
"The after-tax cost of borrowing is always lower than the headline rate for a profitable business. A 10% business loan costs a 25% corporation tax payer an effective 7.5% after the tax deduction."
- Kyrelos Khir, Manager
Frequently Asked Questions
Is invoice finance cost tax deductible?
Yes. Both the service charge and the discount charge on an invoice finance facility are deductible as business expenses, reducing your taxable profit in the period they are incurred.
The bottom line
Always discuss the tax treatment of new borrowings with your accountant before signing. Spark Finance can connect you with accountants experienced in business finance. Start at apply.sparkfinance.co.uk.
Check your eligibilityAbout the author
Kyrelos Khir
Manager
Kyrelos is a finance manager at Spark Finance with a focus on invoice finance and working capital solutions for UK businesses. He helps businesses in professional services, recruitment, and manufacturing unlock cash tied up in their debtor books through factoring and discounting facilities.
