Interest on bank and other loans
for sole traders

Interest on bank and other loans is the category for the cost of borrowing: interest on business loans, overdrafts and credit used for the business, and fees for buying goods on credit. It is box 25 on the full self-employment pages. Repayments of the amount borrowed never go here, and the non-business part of any interest goes in box 40.

What goes in this category

• Interest on business loans and overdrafts.
• Interest on personal loans or cards where the money was used for the business.
• Fees for buying goods on credit.
• Arrangement fees for business borrowing.

What does not

• Capital repayments of loans and mortgages.
• Interest on money used for personal purposes.
• HMRC interest on late-paid tax.
• Interest on residential let mortgages, which gets a 20% tax reduction instead.

Items in this category

Follow the money

Interest is allowable when the borrowed money is used in the business, whatever kind of loan it is. A personal credit card used to buy stock can qualify; a business loan used for a holiday cannot. Where a loan was used for both, split the interest in proportion.

Overdrawn capital

If you draw more from the business than your capital and profits, and the business borrows to fund the gap, the interest on that part is not allowable. HMRC's manual says swapping your own capital for loan finance does not by itself make the interest a business cost.

Capital repayments

Repaying the amount borrowed is never an expense. The asset or cost the loan paid for is relieved in its own way: equipment through capital allowances or the cash basis, stock when sold. Claiming the repayments too would double count.

Cash basis

Before April 2024, the cash basis limited interest to £500. That restriction has gone, so interest is allowable on the same basis whichever accounting method you use.

Landlords

Landlords with residential lets cannot deduct mortgage and loan interest; they get a 20% tax reduction on it instead, entered in box 44 of the UK property pages. Interest on non-residential lets is deducted in box 26.

Credit cards and overdrafts

Interest on a business overdraft is allowable in full when the overdraft funds the business. On a personal credit card, the interest on business purchases is allowable and the rest is personal. Many sole traders find it simpler to keep one card only for business, so its interest can be claimed without apportioning.

Loans to buy into a partnership

Interest on a loan to buy a share in a trading partnership, or to lend money to it, is relieved differently, as qualifying loan interest against your total income, capped at the greater of £50,000 or 25% of adjusted total income. It is claimed on your return rather than in the business accounts.

Refinancing and early repayment

Fees for arranging a business loan and early repayment charges when refinancing business borrowing are finance costs of the business. If a refinance releases extra money that you take out for personal use, the interest on that part is not allowable.

Government-backed and start-up loans

Start Up Loans and similar government-backed business loans are personal loans used for the business. The interest is allowable because the money is used in the business, and repayments of the capital are not. Any grant element that does not have to be repaid is usually business income, not a reduction in costs.

Interest on late-paid tax

Interest HMRC charges on late-paid Income Tax, VAT or PAYE is not a finance cost of the business and never goes in this box. Borrowing to pay your personal tax bill is also borrowing for a non-business purpose, so its interest is not allowable either. If cash is tight at a payment date, a Time to Pay arrangement with HMRC is usually cheaper than borrowing. Interest on genuine business borrowing, used for stock, equipment or working capital, stays allowable in full whichever lender you use.

Records to keep

Keep loan agreements, annual interest statements and a note of what each loan was used for. The use of the money is the key fact, and it is much easier to show at the time than years later.

Short form and Making Tax Digital

If your turnover is under £90,000, you can use the short self-employment pages and give one total for expenses. In Making Tax Digital quarterly updates, businesses under the same threshold can send a single expenses figure.

Worked example: a builder’s borrowing

A builder pays £1,100 of interest on a loan for a van, £300 on an overdraft used for materials, and £240 on a personal credit card of which half was spent on business materials. His box 25 figure is £1,520 (£1,100 + £300 + £120). The loan repayments are not included.

Four questions before a cost goes here

1. Was it for the business, and only for it? A cost must be incurred wholly and exclusively for the trade. A cost with a personal purpose that cannot be separated is not allowable at all.
2. Is part of it personal? Where a business part can be identified, such as business miles or business calls, claim that part on a reasonable basis and leave the rest out.
3. Is it a running cost or something you keep? Running costs belong in the expense categories. Things you keep are capital: an expense on the cash basis (except cars), capital allowances on traditional accounting.
4. Is there a specific rule? Some costs are disallowed whatever their purpose, such as fines and client entertaining, and some have their own treatment, such as cars, which always go through capital allowances.

Trading allowance or expenses

Instead of deducting expenses, a sole trader can claim the £1,000 trading allowance against trading income. You cannot claim both, so the allowance only helps when your allowable expenses are under £1,000. If your gross trading income is £1,000 or less, the allowance covers it and you may not need to register. Once your costs pass £1,000, deducting actual expenses gives the lower profit.

This category in Making Tax Digital

Under Making Tax Digital for Income Tax, each quarterly update carries your expenses in the same 15 categories as the full self-employment pages, so this category is one line of every update. Sole traders with qualifying income over £50,000 join from 6 April 2026, falling to £30,000 from April 2027 and £20,000 from April 2028. If your turnover is under £90,000 you can send one consolidated expenses figure instead of the categories, but you still keep the records behind it. The same £90,000 limit decides whether you can use the short self-employment pages (SA103S), which ask only for total allowable expenses.

Cash basis or traditional accounting

Which accounting basis you use changes when a cost in this category counts, and sometimes whether it counts as an expense. On the cash basis, now the default, you deduct costs when you pay them and most things you buy to keep are ordinary expenses (cars being the exception). On traditional accounting, you deduct costs when you incur them and claim capital allowances for things you keep.

The disallowable column

The full self-employment pages have a second column of boxes (32 to 45) for disallowable expenses. If your accounts include something that is not allowable, such as the private share of a phone bill or client entertaining, you put the total cost in the expense box and the disallowable part in the matching box, so the tax calculation adds it back. The short pages (SA103S) simply ask for allowable expenses, so you leave the disallowable part out.

How much an allowable cost saves

Each pound of allowable expense saves a sole trader 26p at the basic rate (20% Income Tax plus 6% Class 4 National Insurance) and 42p at the higher rate, in England, Wales and Northern Ireland. Scottish Income Tax bands differ, and the sole trader tax calculator works out your own figure.

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 the invoice or receipt for every cost in this category, with a note of the business purpose wherever it is not obvious, and how you worked out the business share of anything also used privately. From 6 April 2026, sole traders and landlords with qualifying income over £50,000 keep digital records and send quarterly updates under Making Tax Digital, falling to £30,000 from April 2027 and £20,000 from April 2028.

Common mistakes

• Including loan repayments.
• Claiming interest on personal borrowing.
• Deducting residential mortgage interest.

Every other category

The other 14 categories on the self-employment pages, in box order:

• Cost of goods sold, SA103F box 17
• Construction industry payments to subcontractors, SA103F box 18
• Wages, salaries and other staff costs, SA103F box 19
• Car, van and travel expenses, SA103F box 20
• Rent, rates, power and insurance costs, SA103F box 21
• Repairs and maintenance of property and equipment, SA103F box 22
• Phone, stationery and other office costs, SA103F box 23
• Advertising costs, SA103F box 24
• Business entertainment, SA103F box 24, disallowed in box 39
• Bank, credit card and other financial charges, SA103F box 26
• Irrecoverable debts written off, SA103F box 27
• Accountancy, legal and other professional fees, SA103F box 28
• Depreciation and loss or profit on sale of assets, SA103F box 29, disallowed in box 44
• Other business expenses, SA103F box 30

The A to Z of expenses lists every item and all 23 categories: the 15 self-employment categories and the 8 for UK property.