Are Business Loans Tax Deductible

Taking out a business loan can help fund expansion, cover short-term cashflow gaps or invest in equipment. But when it comes to completing your accounts or tax return, it is important to understand how loans are treated for tax purposes. The key question for many business owners is: are business loans tax deductible?

In the UK, the answer depends on which part of the loan you are referring to. The loan itself is not tax deductible, because it is not an expense but borrowed capital. However, interest on the loan and certain associated fees may be deductible as allowable business expenses, provided they are used wholly and exclusively for the purpose of the business.

This article explains how business loans are treated for tax, including which parts are deductible, how to record them, and what to watch for depending on your business structure.

Is the Loan Itself Tax Deductible?

No. The loan principal, or the original amount borrowed, is not tax deductible. This is because:

• The loan is not money spent, but money borrowed

• It must be repaid and does not reduce your taxable profit

• It appears as a liability on your balance sheet, not as an expense in your profit and loss account

For example:

• You borrow £50,000 to buy new machinery

• The £50,000 is recorded as a loan liability

• You cannot deduct the £50,000 from your taxable income

Instead, you may claim capital allowances on the machinery you purchase, which reduces your taxable profits, but not the loan used to fund it.

When you repay the loan, the repayments of capital are also not tax deductible. They are simply returning funds that were not taxed in the first place.

Is Interest on a Business Loan Tax Deductible?

Yes. Interest charged on a business loan is tax deductible if the loan was taken out wholly and exclusively for the purpose of the trade or business.

This includes:

• Bank loans for working capital

• Hire purchase agreements

• Overdraft interest

• Business credit card interest

• Commercial mortgage interest

• Director loans to the business (with proper agreements in place)

Interest is treated as a revenue expense and appears in your profit and loss account. It reduces your taxable profit and lowers your Corporation Tax or Income Tax liability depending on your business structure.

For example:

• You borrow £10,000 and pay £800 in interest over the year

• The £800 is recorded as interest expense

• It is deductible against your taxable profit for the year

To be allowable, the loan must benefit the business, and not be used for personal purposes.

Sole Traders and Partnerships

If you are self employed or in a partnership, interest is tax deductible as long as the loan is used for business purposes. You must be able to demonstrate that:

• The funds were spent on business activities

• There is no private or personal use

• The interest relates to business expenditure only

If the loan is used partly for personal reasons, you must apportion the interest and only claim the business portion.

For example:

• You borrow £20,000

• £15,000 is used for business, £5,000 for personal use

• You can only deduct 75% of the interest cost in your Self Assessment return

Keep clear records of how the funds were used and retain loan agreements or bank statements as evidence in case HMRC queries the claim.

Limited Companies

For limited companies, interest on a loan taken out for business purposes is fully deductible for Corporation Tax. It is recorded in the company’s accounts as a finance cost.

This applies to:

• Loans from banks or other lenders

• Director loans (where the director has lent money to the company)

• Commercial mortgages for company premises

• Leasing or HP interest on assets used in the business

If the company repays a director or shareholder loan with interest, the interest paid is deductible, but the director must report it as personal income and may need to pay Income Tax on it.

To ensure compliance, the company should:

• Have a formal loan agreement

• Record interest payments correctly

• Deduct basic rate tax at source under the savings income rules if applicable

Interest deductions must be shown clearly in the company’s statutory accounts and Corporation Tax return.

Capital Allowances on Loan-Funded Purchases

Although you cannot deduct the loan principal itself, you can usually claim capital allowances on the item you purchased with the loan, such as:

• Equipment or tools

• Office furniture

• Company vehicles

• Technology or machinery

For most items, you can claim 100% of the cost in the year of purchase using the Annual Investment Allowance (AIA), subject to the annual limit.

This allows you to reduce your tax bill even though the asset was funded by borrowing. The source of funds (loan or cash) does not affect the capital allowance claim.

For example:

• You borrow £30,000 to buy new machinery

• You claim £30,000 in AIA in the same year

• You repay the loan over three years, but the full tax deduction is given up front

This is a key tax planning point when investing in long-term assets.

What About Arrangement Fees and Other Charges?

Most fees associated with taking out a business loan are also tax deductible, including:

• Loan arrangement fees

• Annual facility charges

• Bank charges for managing the loan

• Legal fees or broker fees incurred as part of securing the loan

These can be deducted as allowable expenses as long as they relate directly to obtaining finance for the business.

However, penalty charges or fees linked to personal borrowing are not deductible. Always check that the expense is clearly for the purpose of trade and not mixed with personal use.

Loans with Mixed Use or Personal Purpose

If you take out a loan that is partly used for business and partly for personal purposes, you must split the interest and fees accordingly.

Only the business portion is allowable. You should document:

• The proportion of the loan used for business

• How the funds were allocated

• A reasonable method of apportionment (e.g. percentage basis)

If the business portion is significant and clearly identifiable, you may still be able to claim a large part of the interest.

Be cautious with using personal loans, credit cards or overdrafts for business purposes, as HMRC will expect you to justify any deduction. Where possible, use a separate business account and loan to keep things clear.

Director’s Loans to the Business

If you are a company director and lend money to your own company, the company can:

• Pay you interest on the loan

• Deduct the interest as a business expense

• Declare and deduct basic rate tax on the interest paid

• Report it to HMRC using the CT61 form if required

You, as the lender, must include the interest income in your Self Assessment return. It is taxable as savings income and may be covered by your Personal Savings Allowance.

Having a clear loan agreement in place is essential to support the tax treatment.

Conclusion

Business loans themselves are not tax deductible, but the interest on the loan, arrangement fees, and other finance charges often are, provided they are incurred wholly and exclusively for the purposes of the business.

For sole traders and partnerships, the expense must relate directly to business activity and be properly apportioned if there is any personal use. For limited companies, interest is usually deductible for Corporation Tax, but any payments to directors must be correctly reported.

When using a loan to purchase business assets, the asset may qualify for capital allowances, giving you a separate route to reduce your tax bill.

To stay compliant:

• Keep clear records of the loan and what it was used for

• Separate business and personal finances wherever possible

• Get professional advice when structuring finance within a company

Used correctly, business borrowing can be both a strategic cashflow tool and a source of legitimate tax deductions.