2 min read
The basic rule for limited companies
UK limited companies are subject to the loan relationship rules under Part 5 of the Corporation Tax Act 2009. Under these rules, interest paid on money borrowed for trading purposes is treated as a debit in the company's loan relationship account and reduces taxable profits. In simple terms: if you borrow to fund business activity, the interest cost reduces your corporation tax bill.
The deduction is available in the accounting period in which the interest accrues, not necessarily when it is paid, unless the company is on a cash basis — which most limited companies are not.
The 'wholly and exclusively' test
HMRC requires that the borrowing — and therefore the interest — relates wholly and exclusively to the business. If a director uses a business loan partly for personal purposes, only the business proportion of the interest is deductible. Mixed-purpose borrowing is an area where HMRC can challenge claims, so it is important to keep clear records of what the funds were used for.
For most straightforward commercial loans — working capital, equipment, property used in the business — the wholly and exclusively test is not difficult to satisfy, provided the purpose is documented.
Fees and arrangement costs
Arrangement fees and other costs directly attributable to obtaining a loan are generally also deductible, either as loan relationship debits or as trading expenses, depending on how they are structured. Where fees are capitalised into the loan rather than charged separately, the accounting treatment determines when the deduction is taken.
Early repayment charges are also generally deductible as a loan relationship debit in the period the facility is closed. See Will I pay a charge to repay early? for more on ERCs.
When to take advice
The deductibility rules become more complex in certain situations: loans between connected companies, loans used to fund non-trading investments, hybrid instruments, and situations where the corporate interest restriction (CIR) rules limit deductions for large groups. If your company is part of a group, is considering related-party lending, or has annual net interest expense above £2 million, take specific advice from a tax adviser before assuming full deductibility.
Nothing on this page constitutes tax advice. Tax treatment depends on individual circumstances and may change. Consult a qualified adviser for your specific position.
Frequently asked questions
Can a sole trader deduct business loan interest in the same way?
This page covers UK limited companies only. Sole traders and partnerships are subject to different income tax rules under HMRC's property and trading income legislation. The principle of deducting interest on wholly business-purpose borrowing applies similarly, but the mechanics differ. Consult an accountant for advice on unincorporated structures.
Is the loan principal repayment also tax-deductible?
No. Repayment of principal is a balance sheet movement — a reduction in a liability — not an income statement expense. Only the interest element is deductible. This is a common point of confusion when directors first look at their loan accounts.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.