Tax implications of business loans in the UK

Find out what impact business loans have on your tax situation, including if they're tax deductible and whether they count as taxable income.

How business loans impact tax Find out what you can claim
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If you’re considering taking out a loan for your business, it’s important to understand how it might affect your tax reporting. Certain business expenses can be deducted from a business’ trading income before it’s subject to tax, but these expenses must be solely used for business purposes.

Here, we explain if you’ll need to pay tax or even get tax benefits when getting a business loan.

Is a business loan considered taxable income?

No, business loans are not generally considered business income. That’s because a loan is money you borrow and pay back, not money the company has earned.

The exception is if a lender or creditor forgives some or all of your debt. This means the debt is written off. The forgiven amount is then considered income for tax purposes.

Are business loans tax deductible in the UK?

When you repay a loan, each repayment covers a portion of the amount borrowed (the capital) and some interest. While a business loan itself is not tax deductible, you should be able to claim the interest you pay on the loan as a tax deduction, provided the loan is only used for business purposes.

If the loan is used to cover business and personal expenses, you can only claim the interest on the loan amount used for business expenses. This makes it particularly important to keep accurate spending records so you can complete your tax return more easily.

This rule can also apply to other forms of borrowing, such as commercial mortgages and business credit cards. In both cases, the interest you pay might also be tax deductible.

Are business loans arrangement fees tax deductible?

Some business loans charge an arrangement fee, which is simply a fee for processing the loan. You might find that business loans with arrangement fees come with lower interest rates, but it’s important to calculate the total cost of the loan before deciding which option is best for you.

Whether this arrangement fee is tax deductible depends on whether you pay it upfront or add it to your balance. If you pay it upfront, you won’t pay any interest on it, but this means you can’t deduct the cost from your tax bill. On the other hand, if the fee is charged as interest repayments, it could be tax deductible. But you need to check with an accountant to be sure.

Can I get a business loan to pay my VAT or tax bill?

Yes, some lenders offer business finance to help cover your VAT or tax bill if your business does not have the capital available.

VAT needs to be paid to HMRC on a quarterly basis, but if you haven’t put enough money aside to cover your bill, a VAT loan could help. These simple loans are generally fast to arrange and can help you avoid penalties for paying your VAT bill late. Once you’ve applied to a lender, the lender pays the amount borrowed to HMRC, and you then repay the lender in monthly instalments, usually over a term of between 3 and 12 months. It’s important that you repay your loan on time and make sure you’ve budgeted for your next VAT payment.

Note that if you pay Corporation Tax late, you’ll be charged interest. Any late payment interest you pay to HMRC is tax deductible for Corporation Tax purposes, so you can include this expense in your company accounts for the relevant accounting period.

Business loans can be an important source of funds for growing your business, but you should always check with your accountant to confirm the tax implications of taking out a loan.”

Chris Lilly, Finder money expert

How do director’s loans work?

A director’s loan is money taken from your company that isn’t either a salary, dividend or expense repayment or money you’ve previously paid into or lent to the company.

All other withdrawals you make from your company account must be listed in your annual accounts at the end of the tax year. If you charge interest on this loan, it is classed as a business expense and personal income. This means you must report it when you complete your self-assessment tax return.

The company will pay you interest minus income tax at the basic rate of 20%. This income tax must be reported and paid quarterly. No corporation tax will be due on the amount borrowed.

Director’s loans are complex, so it’s best to speak to an accountant first to work out what tax is due.

What about self-employed borrowing?

If you’re a sole trader, you might use your personal bank account for business purposes. If so, you might use an overdraft or credit card when you need to borrow funds. Because these are personal accounts rather than business accounts, you can’t claim interest payments as a business expense.

Bottom line

In most situations, business loans are not considered taxable income, and any interest you pay on the loan can be claimed as a tax deduction. However, before taking out a business loan, it’s always worth talking to an accountant or financial adviser to make sure you’re aware of any potential tax implications.

Compare business loans

Table: sorted by representative APR
1 - 14 of 14
Name Product Loan amounts Loan terms Representative APR call to action
Barclays Secured and Unsecured Business Loans
From £1,000
12 to 240 months
-
Subject to application, financial circumstances and borrowing history. Other terms may be available.
Funding Options Unsecured Loan
£1,000 to £20,000,000
12 to 72 months
7.63%
Representative example: Borrow £50,000 over 24 months at a rate of 7.63% APR. Monthly repayment of £2,252.94 and the total amount payable is £54,070.56.
Tide Business Loan
Finder Award
Tide Business Loan
£500 to £500,000
1 month to 72 months
-
Nest Unsecured Business Loan
£10,000 to £5,000,000
-
Portman Finance Business Loan
£10,000 to £2,000,000
3 to 72 months
7.26%
Representative example: Borrow £30,000 over 3 years at a rate of 7.26% p.a. (fixed). Total payable £36,537.84 in 36 monthly repayments of £1014.94.
iwoca Flexi-Loan
£1,000 to £500,000 *start-ups up to £10,000
1 to 24 months
49%
Representative example: Borrow £10,000 over 12 months at a rate of 40% p.a. (variable). Representative APR 49% and total payable £12,294.
mycashline Small Business Loans
£5,000 to £100,000
1 month to 24 months
-
Love Finance business loan
£5,000 to £500,000
-
Cubefunder Flexible Business Loans
£5,000 to £100,000
3 to 12 months
-
Fixed cost of credit.
Funding Circle Unsecured Business Loan
£10,000 to £500,000
6 to 72 months
-
Tide Start-up Loan
Finder Award
Tide Start-up Loan
£500 to £100,000
12 to 60 months
6%
6% APR representative (fixed).
NatWest Fixed Rate Small Business Loan
£1,000 to £50,000
12 to 84 months
12.35%
Borrow £10,000 over 5 years at a rate of 11.7% pa (fixed). Representative APR 12.35% and total payable £13,255.89 in monthly repayments of £220.93 Other amounts available at alternative rates. Rates depend on your circumstances and loan amount and may differ from the Representative APR. Subject to status, business use only.
Lombard Business Finance
£5,000 to £250,000
12 to 84 months
-
HSBC Fixed Rate Small Business Loan
£1,000 to £10,000,000
12 to 120 months
7.1%
Representative example: Borrow £13,000 over 5 years at a rate of 7.1% p.a. (fixed). Representative APR 7.1% and total payable £15,404.01 in monthly repayments of £256.73.
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We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you. Most of the data in Finder's comparison tables is provided by Moneyfacts.

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