Are business loan repayments tax deductible?

Some business loan repayments are tax deductible including (1) the interest you pay and (2) any arrangement or broker fees. These can be classed as a business expense.

The only part of a business loan that is not tax deductible is the capital interest because it is simply paying back money you received.

What the UK government says:

Source: Gov.uk

Table of Contents

Overview

Loan repayments are split into capital and interest
Capital repayments are not tax deductible
Interest payments are usually tax deductible
Some fees linked to the loan may be deductible
Tax treatment depends on how the loan is used

What fees of a business loan are tax deductible?

Item	Tax Deductible?
Loan capital repayment	No
Interest on the loan	Yes (usually)
Arrangement fees	Yes (usually)
Broker fees	Yes (usually)
Late payment fees	Sometimes
VAT on finance costs	Usually not applicable

Do you have to pay tax on a business loan?

No, you do not pay tax on the money you receive from a business loan. This is because a loan is not considered income, it is a liability that must be repaid.

For example, if your business borrows £100,000, this does not increase your taxable profit. It simply increases your cash and your debt at the same time.

This is an important difference. The HMRC taxes profits, not any funds that you borrow.

Are business loans liable for VAT?

Business loans themselves are not subject to VAT but if your loan was introduced via a broker, they may be charging you VAT as part of their sales commission. It is always important to check invoices carefully to see whether VAT has been applied and whether your business can reclaim it.

Otherwise, lending money is considered an exempt financial service in the UK.

Do you have to pay tax on interest charged by business loans?

You do not pay tax on the interest itself, but you can usually deduct it from your taxable profits.

Interest is treated as a business expense, as long as the loan is used for business purposes. This reduces your overall profit, which in turn reduces the amount of tax you pay.

For example, if your business makes £100,000 profit and pays £10,000 in loan interest, you may only be taxed on £90,000.

This is one of the main tax benefits of using business finance. In fact, interest deductions are one of the most common allowable expenses claimed by UK businesses.

Do you have to pay tax on any broker fees charged by business loans?

Broker fees are usually tax deductible if they are directly related to arranging the loan. These are treated as a business expense, similar to interest.

This means they can reduce your taxable profit in the same way.

However, the timing of the deduction may vary and this is something that you will need to check. In some cases, fees are spread over the life of the loan rather than deducted all at once.

It is also important to check whether VAT has been charged on the broker fee, as this may affect your accounts.

Can business loans be claimed as a business expense?

A business loan cannot be claimed as a business expense, only the associated costs, such as interest and certain fees (such as broker fees), can be claimed. This is because a business loan is not a cost, but rather money that you have borrowed that you must repay.

To claim the business loan interest and fees as an expense, the loan must legitimately be used for business purposes. For example, buying stock, paying staff, equipment, or funding growth.

Can a loan be tax deductible if used for personal reasons?

If the loan is used for personal reasons, the interest may not be deductible.

Can I pay my company tax bill with a business loan?

Yes, you can use a business loan to pay your company tax bill. Many businesses do this to manage cashflow, especially when facing a large corporation tax payment.

This is sometimes called a “tax funding loan.” It allows you to spread the cost of your tax bill over time rather than paying it in one lump sum.

In the same way, the interest on this type of loan is usually tax deductible, as it is still considered a business expense.

However, taking on any additional debt should always be considered carefully. While this can ease short-term pressure, it does mean taking on additional debt and could add financial pressure for small and large companies alike.

When taking on a business loan, you should make sure the repayments are affordable and that the loan supports your overall financial position.