Is business loan interest
tax deductible?

Yes. Interest on loans and overdrafts used for the business is allowable, but repayments of the amount borrowed are not (GOV.UK). If a loan is used partly for personal purposes, only the business share of the interest is allowable (SA103F notes). For residential landlords, interest gives a 20% tax reduction instead (GOV.UK).

Borrowing is a normal part of running a business, and its cost, the interest, is a normal business expense. What you borrowed is not: repaying a loan just gives back money that was never income. The main question is what the money was used for, because interest follows the use of the borrowed money, not the type of loan.

Is business loan interest tax deductible?

The HMRC rule

Interest on bank and other business loans, overdrafts and hire purchase is allowable. Repayments of the amount borrowed are not. The rule comes from Legal and financial costs, Work out your rental income when you let property.

GOV.UK lists interest on bank and business loans and hire purchase interest as allowable, and excludes repayments of loans, overdrafts or finance arrangements (legal and financial costs). The SA103F notes put interest in box 25 and say to put the non-business part in box 40 (SA103F notes). HMRC's manual says interest is allowable where the borrowing is used for business expenditure or assets, but simply exchanging capital for loan finance does not qualify (BIM45700). The cash basis no longer restricts interest to £500 (BIM72030).

When you can claim it

• Interest on a business loan used for equipment, stock or working capital.
• Interest on a personal loan or credit card, where the money was used for the business.
• Hire purchase interest on business vehicles and equipment.
• Loan arrangement fees and other incidental costs of business borrowing.

When you cannot

• Repayments of the amount borrowed.
• Interest on the part of a loan used for personal purposes.
• Interest on borrowing that funds drawings above your capital and profits in the business.
• Interest on residential let mortgages as a deduction, which gets a 20% reduction instead.

What to claim instead

The asset you bought with the loan is relieved separately. A van bought on finance gets capital allowances, or is an expense on the cash basis. Stock is a cost when sold. The loan's capital repayments never are, so don't claim both the purchase and the repayments.

How to decide if you can claim it

1. Was it for the business? A cost is only allowable if you incur it wholly and exclusively for the business. If it also serves a personal purpose that cannot be separated, such as clothing that keeps you warm or a meal that keeps you going, HMRC disallows it.
2. Is part of it personal? Where a cost has a business part you can identify, such as the business calls on a phone bill or the business miles in a car, you claim that part and leave the rest out, on a reasonable basis you can explain.
3. Is it a running cost or something you keep? It is a running cost, so on the cash basis it counts when you pay it and on traditional accounting when you incur it. Nothing about it needs spreading over later years.
4. Is there a specific rule? For business loan interest, the deciding rule is interest on business loans: interest on bank and other business loans, overdrafts and hire purchase is allowable. Repayments of the amount borrowed are not.

Worked example: a van on a loan

A courier borrows £20,000 to buy a van. In the first year she repays £4,600, of which £1,400 is interest. The £1,400 is allowable interest; the £3,200 of capital is not. The van itself gets the Annual Investment Allowance on £20,000, whether it was paid for in cash or with a loan.

The use of the money decides

Interest is allowable when the borrowed money is used in the business. A personal loan used to buy business equipment can qualify; a business loan used to buy a family car does not. If a loan was used for both, work out the business share and claim that proportion of the interest.

Overdrawn capital accounts

If you take more out of the business than your capital and profits, and the business borrows to cover the gap, the interest on that part of the borrowing is not allowable. HMRC's manual explains that swapping your own capital for loan finance does not on its own make the interest a business cost. This mainly matters for businesses that borrow while the owner draws heavily.

The cash basis and interest

Before April 2024, the cash basis limited interest and finance costs to £500 unless you apportioned them. That restriction was removed, and the cash basis now allows interest on the same basis as traditional accounting. The cash basis is now the default for most sole traders.

Hire purchase and leasing

On hire purchase, the asset is treated as yours from the start, so it gets capital allowances or a cash basis deduction, and the interest part of the payments is a finance cost. On a lease, you never own the asset, and the lease payments are the expense, subject to rules such as the 15% restriction for some leased cars.

Loans to buy into a partnership

Interest on a loan to buy a share in a partnership, or to lend money to it, can qualify for relief against your total income as qualifying loan interest, rather than as a business expense. The relief is capped, generally at the higher of £50,000 or 25% of your adjusted total income.

Where it goes

Loan interest goes in interest on bank and other loans, box 25 of the full self-employment pages, with any non-business part added to box 40. Hire purchase and lease interest and bank charges go in box 26. Landlords with residential lets put finance costs in box 44 of the UK property pages.

If you are a landlord

For residential lets, loan and mortgage interest and the costs of getting a loan are not deducted; they give a tax reduction of 20% of the finance costs, entered in box 44 of the UK property pages. Interest on loans for non-residential lets is deducted in full in box 26 (GOV.UK).

Where it goes on your return and in MTD

For a sole trader, the allowable part goes under interest on bank and other loans (SA103F box 25 on the full self-employment pages). Under Making Tax Digital for Income Tax, it goes in the same category of your quarterly update, which is the category TapTax files it under when you record the cost.

For a landlord, it belongs in non-residential property finance costs (SA105 box 26 on the UK property pages), and in the matching category of a Making Tax Digital property update.

If your turnover was under £90,000, you can use the short self-employment pages (SA103S), which ask for a single figure for total allowable expenses rather than a box-by-box breakdown, and the full pages let you give just a total in box 31 too. The category still matters for your own records and for Making Tax Digital, where each quarterly update uses the same categories unless you choose to send one consolidated figure.

Most sole traders now use the cash basis, the default from the 2024/25 tax year, which counts a cost when you pay it. On traditional accounting you count it when you incur it, and equipment you keep goes through capital allowances rather than expenses.

How much an allowable cost saves

The value of a deduction is the tax it removes from your profit, not the cost itself. At the basic rate a sole trader saves 26p for every pound of allowable expense, at the higher rate 42p, and in the personal allowance taper between £100,000 and £125,140 as much as 62p. Landlords pay no Class 4 on rental profit, so they save 20p or 40p.

What £1,000 of allowable expense saves a sole trader in 2026/27

• Basic rate (20% + 6%)£260
• Higher rate (40% + 2%)£420
• Additional rate (45% + 2%)£470
• Allowance taper band (60% + 2%)£620

Records to keep

Keep bank and card statements, loan agreements and annual interest statements, and a note of how you split any account or loan used for both business and personal purposes. Records must be kept for at least five years after the 31 January deadline for the tax year.

From 6 April 2026, sole traders and landlords with qualifying income over £50,000 keep these records digitally and send quarterly updates under Making Tax Digital, falling to £30,000 from April 2027 and £20,000 from April 2028. The MTD requirement checker shows when it applies to you.

Common mistakes

• Claiming capital repayments.
• Claiming interest on the personal share of a loan.
• Deducting residential let mortgage interest as an expense.

Related expenses

This item sits in the interest on bank and other loans category, alongside HMRC late payment interest and mortgage capital repayments. The A to Z of expenses answers the same question for every other cost.

TapTax sorts each cost into the right category as you record it, applies the business share where you set one, and keeps the receipts with the figures, ready for your quarterly updates and final return.