Repaying a business loan entails addressing both the principal amount borrowed and the accompanying interest payments. It’s important to note that the loan itself isn’t eligible for tax deduction.
Under UK tax regulations, you can typically claim the interest you disburse on the loan as a tax deduction, provided that the funds procured from the loan are exclusively dedicated to business purposes.
In essence, this means that while the capital repayment remains outside the realm of tax benefits, the interest payments can help alleviate some of the financial burden for businesses, ultimately promoting growth and sustainability in the ever-evolving landscape of UK commerce
Can business loans be claimed as a business cost?
When you aim to sharpen your financial acumen, it’s essential to start by gaining a firm understanding of the tax advantages that business loans utilised in your business operations, regardless of whether you’ve acquired a business loan or a personal one.
MORE: Can I use a personal loan to start a business?
Are business loan payments tax-deductible?
Business loan payments encompass two main components: the gradual repayment of the borrowed capital and the accumulation of interest throughout the loan’s duration.
While the capital repayments do not qualify for tax deductions, there is a potential silver lining in the form of interest deductions. Interest is typically regarded as a legitimate business expense, allowing you to consider it for tax benefits.
Assuming your loan serves an exclusively business-related purpose, you should generally be eligible to claim deductions on the interest payments when filing your taxes.
If your loan serves dual purposes, covering both personal and business expenses, the tax deduction applies solely to the business-related expenses. In such cases, meticulous record-keeping becomes paramount to accurately inform your tax assessment process
Can I use a business loan to pay my VAT or tax bill?
Certainly, when your business bank accounts lack the necessary funds to meet crucial obligations, such as VAT and tax payments, various funding solutions come into play.
Yes, as a business owner, it’s imperative to ensure timely quarterly VAT payments to HMRC. While prudent planning should involve setting aside the required VAT amount, situations may arise where you find yourself short of funds. In such cases, a VAT business loan emerges as a valuable option, enabling you to settle your obligations promptly.
A VAT business loan can serve as a financial lifeline, helping you address your immediate financial needs. It’s vital to then meticulously budget your resources to ensure timely repayments and to safeguard against any future VAT commitments.
If circumstances lead to a delayed settlement of your VAT or other tax liabilities, it’s worth noting that the interest incurred on these late payments may be tax-deductible for Corporation Tax purposes. This means that you can include this interest expense in your financial records for the period when it was accrued. For more detailed information about corporation tax interest charges, you can refer to the resources available at Gov.uk.
Other forms of finance
Interest payments on various financial instruments, such as business credit cards and commercial mortgage repayments, could potentially open the door to tax deductions.
Regarding commercial mortgages, the tax benefits extend to those with secured business loans, encompassing properties that serve both personal and business purposes and are used as collateral. In such cases, the interest paid on these loans can be considered eligible for tax deduction.
Is a business loan considered taxable income?
No, a business loan typically does not fall under the category of taxable income. This is because the funds acquired through a business loan are considered borrowed capital, not earnings generated through your standard business operations.
An exception to this standard practice arises when the lender, whether it’s a formal financial institution or a personal connection like a family member or friend, decides to forgive a portion or the entirety of your loan. In such instances, the forgiven debt would then be regarded as taxable income for the purpose of taxation.
Are director’s loans tax-deductible?
Engaging in a director’s loan arrangement entails two primary scenarios: withdrawing money from your limited company or injecting your personal funds into your business.
When it comes to funds drawn from your business, a director’s loan encompasses any sum not allocated for salaries, dividends, or repayments, especially when your withdrawals exceed your contributions.
It’s worth noting that money previously loaned to your company doesn’t trigger director’s loan considerations if you transfer it out of your business account.
Nevertheless, any withdrawals made for reasons other than those mentioned must be meticulously recorded in your annual accounts at the conclusion of your fiscal year. Loans to directors are subject to specific tax regulations and potential associated charges.
If you opt to charge interest on a loan to your company, this interest is categorized as a business expense and simultaneously contributes to your personal income. Consequently, you’re required to report this interest on your personal self-assessment tax return. Your company, on the other hand, must disburse the interest, withholding Income Tax at the basic rate of 20%, and subsequently report and remit the Income Tax on a quarterly basis using the CT61 form.
It’s important to emphasize that your company won’t be liable for any Corporation Tax on the money you lend to it. While director’s loans aren’t tax-deductible, they do present a significant level of complexity. Businesses that utilise such arrangements often benefit from the guidance of an accountant to navigate the intricacies and determine the appropriate tax liabilities.
What if you’re self-employed?
While it’s entirely possible that, as a sole trader or a business within a partnership, you might be managing your enterprise through a personal bank account, there are certain financial considerations to keep in mind.
Operating from a personal account gives you the flexibility to tap into the overdraft or utilize credit cards for immediate personal fund access. However, it’s important to note that if you choose not to utilize a designated business bank account, you won’t be able to categorize interest payments as business expenses.
Recognizing this, some financial institutions offer dedicated sole trader business bank accounts. It’s prudent to explore and compare the features and benefits these specialized accounts provide before deciding to conduct your business transactions solely through a personal bank account. This approach can help you make more informed choices for the financial management of your business operations.
How do arrangement fees work?
Arrangement fees serve as straightforward administrative charges imposed by financial providers in the process of setting up credit arrangements.
These fees are most commonly encountered in the realm of mortgages, but they can also be applied when securing a business loan or, in some cases, when acquiring car finance. Typically, these charges are justified as covering the expenses related to processing the loan application.
The inclusion of an arrangement fee in a business loan product allows providers to present a more enticing proposition by offering a lower interest rate. This can undoubtedly pique the interest of businesses engaged in the comparison of various loan options.
It’s crucial to keep arrangement fees on your radar when assessing the affordability of a loan or seeking out the most advantageous deal. Focusing solely on the advertised interest rate can obscure the comprehensive picture of your total costs.
For businesses seeking financial solutions, the last thing you want is to be burdened with an additional cost, especially in the form of an administrative fee. Therefore, a prudent approach involves taking these fees into account to make well-informed decisions about your financing.
Are arrangement fees tax-deductible?
Arrangement fees, in essence, represent a standard administrative charge levied by credit providers when facilitating credit arrangements.
These fees are commonly associated with mortgage applications by consumers, but they can also be encountered when securing a business loan or, occasionally, when acquiring car finance. Typically, the rationale behind these fees is their coverage of application processing expenses.
Incorporating an arrangement fee into a business loan product enables providers to offer a more appealing package, featuring a lower interest rate. This becomes a noteworthy selling point for businesses actively comparing various loan options.
It’s prudent for businesses to factor in arrangement fees when assessing a loan’s affordability or in pursuit of the most advantageous deal. Relying solely on the advertised interest rate can obscure the comprehensive financial picture.
For businesses seeking financing, the addition of an administrative fee is far from ideal, and it’s important to weigh the costs. But whether arrangement fees are tax-deductible hinges on the timing of payment.
If you settle the arrangement fee upfront, you won’t be eligible to deduct it from your tax bill. However, if the fee is structured as part of interest repayments, it might be considered tax-deductible. When in doubt about the tax treatment of your arrangement fee, it’s advisable to consult with a chartered accountant.
Landlords, on the other hand, can take solace in the fact that arrangement fees are fully tax-deductible against rental profits
Finding the right loan for your business
When you’re gearing up to finance the next phase of expansion for your small business, address outstanding debts, or acquire essential equipment, it’s imperative to conduct a thorough evaluation of your financing options.
You have the choice to select a business loan from a conventional high street bank, or you might be enticed by the distinctive features presented by an alternative lender. Ultimately, the goal is to secure a loan that aligns perfectly with your specific business objectives and current circumstances.
PDQ Funding have been providing businesses with loans since 2010, if you venture is in need of finance for growth, simply complete an online enquiry.
Jarred Musson is a versatile writer with a diverse educational background and a passion for all things business. Holding a Master of Science (MSc) degree in Marketing and a Bachelor of Arts (BA Hons) in Multimedia Journalism from Manchester Metropolitan University, Jarred possesses a unique blend of expertise that allows him to dissect and communicate complex business topics with clarity and precision.