Does tax relief on interest make borrowing

2 min read

After-tax cost is lowerRelief reduces it

Only if profitableNo profit, no relief now

Not a reason to over-borrowCost still real

Accountant confirmsYour position

The after-tax cost idea

When loan interest is deductible against profits, it reduces your taxable profit and therefore your corporation tax bill. So the true, after-tax cost of that interest is lower than the headline figure: part of it is effectively offset by tax you no longer pay. For a profitable company this makes borrowing a little cheaper in real terms than the rate alone suggests. See which parts are deductible.

The catch: you need profits

The relief only bites if you have taxable profits to set the interest against. A loss-making company gets no immediate tax benefit from the deduction, though losses can sometimes be carried forward. So 'borrowing is cheaper after tax' is true for a profitable business and much weaker for one not currently paying tax. Judge the benefit against your actual tax position, not a general assumption.

Keep it in proportion

Tax relief lowers the cost of borrowing you were going to do anyway — it is not a reason to borrow more. The interest is still a real outflow; relief only softens part of it. Factoring the after-tax cost into a decision is sensible; using it to justify over-borrowing is not, because you still pay most of the interest and all of the capital. See avoiding over-borrowing.

Work out the headline cost first on the true cost calculator, then discuss the after-tax figure with your accountant. To get a quote, apply.

Frequently asked questions

How much does tax relief reduce my borrowing cost?

It reduces the interest cost by roughly the rate of corporation tax you would otherwise pay on the profit the interest offsets — so a profitable company effectively recovers part of the interest through a lower tax bill. The exact benefit depends on your profits and tax rate, and applies only if you have profits to relieve it against. Your accountant can quantify it for your position.

Does a loss-making company get any interest relief?

Not immediately in the way a profitable one does, because there is no current profit to set the interest against. However, losses including deductible interest can sometimes be carried forward to relieve future profits, subject to the rules. The immediate cash benefit of relief is a profitable-company advantage; a loss-making business should not assume it when judging affordability.