Is business loan interest tax deductible?

What's deductible — and what isn't

The rule turns on a clean distinction. Interest and finance charges are a cost of running the business, so they reduce your taxable profit. The capital you borrowed is not — repaying it simply returns money you were lent, so those repayments aren't an expense.

So if your company repays £1,100 in a month made up of £1,000 capital and £100 interest, only the £100 reduces your Corporation Tax bill. Over the life of a short-term facility the deductible portion is the total interest and fees you actually pay, spread across the accounting periods in which it falls due.

The 'wholly and exclusively' test

HMRC allows interest as a deduction where the loan is used wholly and exclusively for the purposes of the trade. Borrowing to buy stock, cover payroll, fund a fit-out or bridge a seasonal gap clearly qualifies. Borrowing partly for private purposes does not — only the business-use proportion would be allowable.

Because Credicorp lends to the limited company for working-capital purposes, the borrowing sits squarely inside the company's trade. Keep the loan agreement, statements and a clear record of what the money funded; that evidence is what supports the deduction if HMRC ever asks.

Fees and how it appears in your accounts

Arrangement fees, facility fees and similar finance costs are generally allowable in the same way as interest, as a cost of obtaining the finance. Your accountant will usually post interest and fees to a finance-costs line in the profit and loss account, separate from the loan balance shown on the balance sheet.

One practical point: the deduction follows the accounting period in which the cost is incurred, so a loan taken late in your financial year only relieves the interest that falls in that year. The rest relieves in the following period.

What this means for your company

For a profitable limited company, deductibility lowers the real cost of borrowing. If your company pays Corporation Tax at 25%, every £100 of allowable interest cuts your tax bill by £25 — so the effective cost of that interest is £75. A loss-making company carries the relief differently, which is another reason to involve your accountant.

None of this is tax advice specific to your situation. Confirm the position with your accountant or HMRC before relying on it, and see how business loan interest is calculated to understand exactly what you'll be paying.