Are business loans tax deductible? Only partly. HM Revenue and Customs treats a business loan as a liability, not income, so the loan principal is never deductible, but interest and qualifying fees often are, at the 25% corporation tax main rate for 2026/27.

Whether you are looking for a standard corporate advance or evaluating options such as a secured business loan, understanding how borrowing costs interact with your tax obligations is essential for accurate financial planning.

Key takeaways:

• Loan interest and qualifying fees are deductible if used wholly and exclusively for business; a capital repayment never is.
• The corporation tax main rate is 25% (for profits over £250,000), so £1,000 of deductible interest saves £250 in tax for companies paying this higher rate.
• Repaying a director’s loan follows the same non-deductible rule as any other business loan.

Are Business Loans Tax Deductible?

No, not in full. HM Revenue and Customs treats a business loan as a liability on the balance sheet, not as income or an expense, because the money must be repaid. That distinction is the entire answer: only the cost of borrowing is deductible, never the amount borrowed.

This matters because many business owners assume repaying a loan reduces their tax bill in the same way a genuine expense does. It doesn’t.

Repaying £10,000 of loan principal has no more effect on taxable profit than moving money between bank accounts, because from HMRC’s perspective, that’s essentially what it is.

Which Loan Costs Are Tax-Deductible, and Which Aren’t?

Interest and certain fees are usually deductible, provided the loan is used wholly and exclusively for business purposes, HMRC’s core test for any finance cost. A capital repayment on the loan is never deductible.

If the loan is used to purchase a qualifying asset, such as machinery or a commercial vehicle, the cost of the asset itself is claimed separately through capital allowances, while the loan interest is claimed as a finance expense.

The table below sets out the main elements:

If a business loan is used partly for personal spending, only the business-use share of the interest can be claimed as a deduction.

HMRC disallows the private-use portion of the interest even when the loan was arranged entirely through the business bank account, so mixed-use borrowing needs a clear split from day one.

For example, if a business repays £1,200 a month on a commercial loan, consisting of £1,000 in principal and £200 in interest, only the £200 interest is recorded as a deductible expense. The £1,000 capital repayment does not reduce the taxable profit.

Do the Rules Change If You Lend Money to Your Own Company?

A director can lend money into their own company, or the company can lend to the director; HMRC treats these as opposite transactions.

• Director lends to the company: Repayment is a return of capital, not an expense, so it isn’t tax deductible, whether repaid in one year or spread across several.
• Company lends to the director: This is the more familiar director’s loan account, triggering a Section 455 corporation tax charge if the balance isn’t cleared within nine months and one day of the corporation tax accounting period end.

If the director personally borrowed to fund their loan to the company, they may separately claim qualifying loan interest relief, but repaying the company loan early reduces that relief.

How to Claim a Business Loan Interest Deduction?

Claiming corporation tax relief or income tax relief depends on structure, but sole trader and limited company treatments both follow one principle: record the interest, not the capital.

For limited companies:

1. Record loan interest as a finance expense in the profit-and-loss account
2. Reflect this in the CT600 corporation tax return, no separate claim is needed if the accounts are correct
3. Spread arrangement fees over the loan term, or expense them upfront

For sole traders and partnerships:

1. Enter interest and eligible fees under finance costs on the SA103 self-assessment tax return
2. Deduct these costs from turnover to reduce taxable profit
3. Under cash basis accounting, claim costs in the year they’re actually paid

It is also vital to remember how amortisation works: if you pay a fixed monthly amount, the deductible interest portion will be highest in the early years and shrink over time as the capital balance reduces.

What Records are needed for claiming loan interest?

HMRC can ask for evidence at any point to prove interest qualifies as an allowable business expense deduction, so the records below should be kept for as long as HMRC requires: six years from the end of the financial year for limited companies, and at least five years after the 31 January submission deadline for the self-employed.

• The loan agreement, showing the interest rate and stated purpose
• Bank statements evidencing the loan drawdown and repayments
• Invoices or receipts linking the funds to business spending
• Board minutes recording the decision to borrow, for limited companies
• A clear split of any personal and business use, if the loan was mixed

What records are needed for a loan interest deduction ultimately comes down to proving the money was used wholly and exclusively for the business. Without that trail, HMRC guidance is clear that a claim can be disallowed.

When can a Business Loan Create an Unexpected Tax Bill?

Borrowing itself rarely creates a tax charge, but three situations can. First, if part of a loan is written off by the lender, the forgiven amount is usually treated as taxable income, meaning you will pay tax on the cancelled portion.

A loan used for both business and personal spending needs the interest split accordingly, since HMRC will only allow the business-use share.

For businesses using cash basis accounting, interest on loans used wholly and exclusively for the trade is fully deductible.

The historic £500 annual cap on interest claims was abolished in April 2024; interest on loans used wholly and exclusively for the trade is now fully deductible, while any personal-use portion remains completely disallowed.

Conclusion

Are business loans tax deductible in full? No, only the interest, arrangement fees, and related finance costs are, provided the loan is wholly and exclusively for business use.

The loan principal, and any repayment of it, including to a director, stays outside the tax calculation regardless of how long it runs.

Disclaimer: Lending terms and eligibility vary by provider and individual circumstances. Figures in this article reflect rates published as of the 2026/27 tax year; readers should confirm current terms directly with HMRC or a qualified accountant before making a decision.

FAQs

Are start-up loan fees tax-deductible?

Yes, arrangement fees and legal costs associated with securing a start-up loan are generally deductible as a finance expense, provided the loan is used entirely to launch and run the business.

Do I pay tax on a forgiven business loan?

Yes, if a lender writes off or forgives a portion of your business loan, HMRC usually treats that cancelled amount as taxable income for the business in the year it is written off.

Is a business loan considered taxable income?

No. It’s borrowed money that must be repaid, not income earned, so it doesn’t increase taxable profit. The exception is if part of the loan is written off, which HMRC may then tax as income.

Are business loans liable for VAT?

No. A business loan is a financial transaction, not a supply of goods or services, so it isn’t subject to VAT. Legal or arrangement fees may include VAT if the lender is VAT-registered.