Business Loan Interest What Tax Relief You Can (and Can’t) Claim in the UK

“It’s not the man who has too little, but the man who craves more, that is poor.” — Seneca

Funding a business isn’t for the faint of heart. Whether you’re just starting out or growing something that’s already taken shape, money matters — and so does how you handle it.

One of the most common questions I hear from clients is: “If I take out a loan for my business, can I claim tax relief on the interest?”

The short answer? Yes — but only if you get the details right.

Let’s break it down, using plain English and real-world examples.

Interest vs Capital: What You Can (and Can’t) Claim

First things first. When you take out a loan, you're repaying two things:

1. The capital (the actual money you borrowed)

2. The interest (the cost of borrowing it)

Here’s the golden rule: You can’t claim tax relief on repaying the loan itself. That’s just giving back what wasn’t yours to begin with. But the interest — that’s where HMRC gives you a break.

Provided the loan is used wholly and exclusively for business purposes, the interest is usually tax-deductible.

Let me give you an example.

Meet Bob: A Simple Case with a Costly Twist

Bob owns a small design agency. He borrows £100,000, secured on his house, and lends it to his limited company to help buy equipment and cover early wages.

In the beginning, he’s entitled to claim tax relief on the interest — everything looks good.

But here’s what Bob didn’t realise: every time the company repays part of the loan to him, it’s treated as repayment of the capital.

So when the company paid Bob £50,000 back within two years, HMRC saw that as a reduction in the qualifying loan. After that, the remaining interest payments didn’t qualify for tax relief anymore.

Worse still? When Bob tried to re-lend the money later, HMRC wouldn’t allow tax relief on the “re-borrowed” portion either.

Lesson? You can’t play ping-pong with qualifying loans.

What Types of Loans Actually Qualify?

Not all loans are treated equally. To get tax relief, the borrowed money must be used for certain approved purposes. These include:

• Running a business or trade

• Buying plant, machinery, or other capital assets

• Investing in a close company (i.e., one controlled by five or fewer people), provided you own over 5% or work full-time in the business

• Acquiring an interest in a trading partnership (but not an investment-focused LLP)

• Lending to your own company for business use (like buying equipment)

If you’re buying something that’s used personally — even partially — like a car, only the business-use portion of the interest is deductible.

For example: If you use a car 40% for business and 60% for personal errands, you can only claim 40% of the loan interest.

Seems fair, right?

When Loans Stop Qualifying — Without You Knowing

Here’s where things can get tricky.

A loan might start off as qualifying but become non-qualifying over time.

That usually happens when:

• The capital is no longer used for business (e.g., it’s moved to a personal account)

• The loan is repaid and re-borrowed without a qualifying purpose

• The loan terms are unrealistic (say, if you charge your company no interest or use an unusually high rate)

If HMRC thinks a loan isn’t at “arm’s length,” they might disallow the tax relief. This often catches out directors who lend to their companies informally.

What About Overdrafts, Credit Cards, or Start-Up Loans?

Overdraft and credit card interest? Nope — HMRC doesn’t allow tax relief for those, even if they’re used for business.

But government-backed start-up loans? Yes — interest on these is usually tax-deductible, provided the loan meets the same business-use test.

Cash Basis Users — Watch Out for the £500 Cap

If you’re a sole trader using the cash basis of accounting (i.e., only recording money in and out), you face a tighter restriction.

Your total finance costs — including loan interest and arrangement fees — are capped at £500 a year.

So if you’re planning to borrow more, consider switching to traditional accruals accounting to claim the full deduction.

Section 24 and the Property Investor's Trap

If you’re a landlord, this might sting. Since Section 24 came into full effect, you can’t deduct mortgage interest from your rental income unless your properties are held in a limited company.

Instead, you get a 20% basic-rate tax credit — not great if you're a higher-rate taxpayer.

But there’s a silver lining. If you operate your property business via a limited company, full interest relief still applies — Section 24 doesn’t touch you.

What You Should Do Now

1. Track how every loan is used — keep good records and document the business purpose.

2. Avoid blending personal and business loans — the line between them matters.

3. Consult an accountant or tax adviser before making repayments — once you repay a qualifying loan, you may not get relief again.

4. Check your accounting method — if you're using the cash basis, make sure you're not missing out on valuable relief.

Final Thoughts

Tax relief on interest isn’t automatic — but it’s there if you play by the rules. Understand the purpose of your borrowing. Keep it clean. Avoid grey areas.

Think like Bob — but don’t make his mistake.

If in doubt, ask a professional. A simple conversation could save you thousands.

Want tailored advice on how to structure your business borrowing for maximum tax efficiency? Get in touch with Cannon Accountants — we’re here to help.

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