Guide
Is Business Loan Interest Tax Deductible?
At a glance
- Loan interest: tax-deductible, reduces your tax bill via tax relief on the interest element.
- Capital repayments: not deductible.
- Arrangement fees: usually deductible, confirm treatment with your accountant.
- Secured or unsecured: no difference in tax treatment either way.
The general position
Interest paid on a business loan used wholly and exclusively for business purposes is generally treated as an allowable expense, reducing your taxable profit for the period. This applies whether the loan is secured or unsecured: what matters to HMRC is how the funds were used, not whether an asset was pledged as security. In practice, that means the interest element of your loan repayments can typically be claimed against income for a sole trader or partnership, or against profits chargeable to Corporation Tax for a limited company.
What is, and isn’t, deductible
- Loan interest. Deductible, provided the borrowing was wholly and exclusively for the business.
- Arrangement fees and similar costs. Often treated as an allowable expense too, though some fees may need to be capitalised depending on how they’re structured. Check the specific treatment with your accountant.
- Capital repayments. Not deductible. Only the interest element of each repayment reduces your taxable profit; the portion that repays the loan balance itself doesn’t.
- Personal-use funds. If any part of the loan was used for non-business purposes, that portion of the interest is not an allowable business expense, even if the loan itself is in the business’s name.
How to claim it
For sole traders and partnerships, loan interest is entered as a business expense on your Self Assessment return, reducing the profit figure income tax is calculated against. For limited companies, it’s deducted from profits before Corporation Tax is calculated. In both cases, you’ll need to keep records showing the loan was used for business purposes and that the interest figure claimed matches what was actually paid, since HMRC can ask for evidence.
Does it matter whether the loan is secured or unsecured?
No. The tax treatment of the interest is the same for a secured business loan and an unsecured business loan. What changes between the two is the rate, the amount you can borrow and how quickly funds arrive, not how HMRC treats the interest. See our secured vs unsecured comparison if you’re still deciding which route fits your business.
Pros and cons of claiming tax relief on loan interest
- Pros: a genuine reduction in your tax bill for money you’re already spending on business finance, and it applies to both secured and unsecured borrowing, so it’s not a factor in choosing between them.
- Cons: it only offsets part of the true cost of borrowing (capital repayments still come out of post-tax cash flow), and getting the claim wrong, for example claiming relief on funds used personally, can create problems if HMRC later reviews it.
Common questions
Does tax relief make a loan “free”? No. Relief reduces your tax bill by a fraction of the interest paid, it doesn’t offset the interest itself pound for pound, still less the capital you’re repaying.
Do I need to claim it separately? No separate claim process exists; it’s factored into your normal Self Assessment or Corporation Tax return as part of your allowable business costs for the period.
Structure matters more than product type
How the deduction is applied depends on your business structure (sole trader, partnership, or limited company) and how the loan is recorded in your accounts, not on whether the loan is secured or unsecured. This guide explains the general principle; it isn’t a substitute for advice from your accountant on your specific loan, business structure and how National Insurance and Corporation Tax interact with your particular accounts.