Repaying loan capital is different from paying interest or finance charges. You should not claim the whole repayment as a business expense simply because the borrowing was used by the business.
The tax treatment depends on the borrower, accounting basis, purpose and type of cost. This guide provides general information; your accountant should determine the entries and deductions for the actual agreement.
Separate principal from interest
The principal is the money borrowed. Repaying it reduces the debt rather than creating an ordinary revenue expense. Interest and charges need to be considered separately under the applicable tax rules.
For illustration, a £1,000 payment might contain £800 of principal and £200 of interest. That does not establish a £1,000 deduction. Identify the components first, then assess whether and when any interest or charge is allowable.
Sole traders and individual business partners
HMRC’s self-employed expenses guidance lists interest on bank and business loans among possible business costs, but excludes repayments of loans, overdrafts and finance arrangements. Only the business element should be considered where spending has mixed purposes.
Keep evidence of how the borrowed money was used, together with statements identifying interest and charges. The account from which a payment is made does not by itself establish deductibility.
Older cash-basis articles can be misleading: the specific £500 interest deduction restriction was removed from 2024/25. See the government’s cash-basis changes. The ordinary rules and facts of the expense still matter.
Limited companies use different rules
Company finance is not assessed simply by applying the self-employed expenses guide. Interest and other amounts can fall within the Corporation Tax loan relationships rules, subject to their conditions and restrictions.
HMRC’s Corporate Finance Manual explains that regime. Ask the accountant to review the agreement and accounting treatment, including the timing of any deduction.
Borrowing in a company’s name is also different from a director personally borrowing and then lending money to the company. Keep the transactions and responsibilities clear.
Arrangement fees and other funding costs
Identify each charge and its purpose. Do not assume every amount called a fee is deductible immediately or treated the same as interest. Timing and classification can depend on the agreement and accounting rules.
A merchant cash advance, lease or invoice facility can have a different structure from a conventional loan. Give the accountant the complete agreement instead of renaming every charge as loan interest.
Loan proceeds, tax bills and director transactions
Record a repayable loan separately from trading sales and keep the liability clear. If debt is released, refinanced, used privately or connected with a director, obtain advice on the consequences rather than assume the original treatment continues unchanged.
Borrowing to pay a tax bill does not by itself determine whether the financing cost is allowable. Nor does the loan turn a non-deductible payment into a deductible one. Review the underlying tax and financing separately.
The government’s director-loan guidance explains that interest a director charges a company can create both company and personal tax responsibilities. Check the relevant reporting rather than treating it as an informal transfer.
Records to give your accountant
- The signed funding agreement and fee schedule.
- Statements separating principal, interest and other charges.
- Evidence of the spending funded.
- Details of business and personal use.
- Refinancing, settlement or debt-release documents.
- Any director or connected-party transactions.
Compare borrowing on its gross cash cost first. A possible tax deduction is not a guaranteed refund and does not remove the payment obligation. For borrowing options, see small business loans.
Frequently asked questions
Can I deduct the whole monthly repayment?
No. Separate capital from interest and charges. Loan capital repayment is not an ordinary revenue expense; other amounts require their own tax assessment.
Is all business-loan interest automatically allowable?
No. The borrower, purpose, accounting basis and applicable rules matter. Ask your accountant to assess the actual cost.
Does the old cash-basis £500 interest cap still apply?
The specific restriction was removed from 2024/25. Check current HMRC guidance and the remaining conditions for the expense.
Are merchant cash advance fees the same as loan interest?
Not automatically. Give your accountant the actual agreement so the structure, charge and timing can be assessed.
For background on the borrowing structure itself, read our guides to limited company loans and merchant cash advance costs.
Discuss your business funding requirements
Complete the online enquiry form or call 01246 233108. Explain the business, purpose and amount required so the next steps reflect your circumstances.
PDQ Funding is a broker, not a lender. We do not charge for using our brokerage service and receive lender commission following a successful introduction. There is no obligation to accept an offer.