Which parts of a business loan are tax-deductible?

2 min read

Interest: deductibleUsually, if for trade

Fees: usually deductibleArrangement, etc.

Capital: not deductibleIt's not an expense

Confirm with accountantYour specifics

The general rule

Where a limited company borrows for genuine trading purposes, the interest is normally an allowable expense deductible against taxable profits, as are most associated fees — arrangement, documentation and similar costs. The capital repayment is different: repaying the principal is simply returning money you borrowed, not incurring a cost, so it is not deductible. See is loan interest tax-deductible.

Why capital is treated differently

It helps to separate the two halves of a payment. The interest portion is the price of borrowing — a real business cost, so deductible. The capital portion just pays back the loan; your profit is not reduced by handing back borrowed money. This is why only part of each repayment gives tax relief, and why the split shown on your amortisation schedule matters for your accounts.

Getting it right in the accounts

To claim correctly, your bookkeeping needs to separate interest from capital on each payment, and treat any fees per their nature and your accountant's advice — some are deducted as incurred, others spread. The borrowing must be for the trade, not for non-qualifying purposes. Because the detail depends on your circumstances and current rules, confirm the treatment with your accountant. See arrangement-fee deductibility.

Keep the interest-versus-capital split clear from your repayment schedule, and read the management accounts guide.

Frequently asked questions

Can I deduct my whole loan repayment against tax?

No — only the interest portion of each repayment is normally deductible, plus most fees. The capital portion is not, because repaying principal returns borrowed money rather than incurring a cost. Your accounts should split each payment into interest and capital so the deductible part is claimed correctly and the non-deductible part is not.

Are loan fees deductible in the year I pay them?

Often, but not always in one go — some fees are deducted as incurred while others are spread over the life of the loan, depending on their nature and accounting treatment. Arrangement and similar fees for a trading loan are generally allowable, but exactly how and when depends on the rules and your circumstances, so confirm the timing with your accountant.