Tax Deductibility of UK Business Loan Interest: What Counts
UK SMB loan interest is generally tax-deductible against trading profits, reducing the after-tax cost of borrowing materially. But the rules have edges: certain loan structures, related-party arrangements, and personal-use elements affect deductibility. This guide covers the standard treatment and the situations where deductibility is restricted.
Director, BestBusinessLoans
Oliver leads BestBusinessLoans's editorial reviews and methodology. With a background in UK commercial finance, he oversees lender research, rate verification and review independence.
Last reviewed: 11 May 2026
Standard deductibility rules
Interest on a UK commercial loan used for trading purposes is generally tax-deductible against trading profits under UK corporation tax rules (CTA 2009 loan-relationship provisions for companies). The interest reduces taxable profit; at 25% corporation tax (main rate 2026), each £1 of deductible interest reduces tax by 25p. A £100k loan at 10% APR costs £10k in interest, but the after-tax cost is £7,500. The deductibility is automatic for trading-purpose loans; no special claim or election required.
What counts as trading purpose
Five common trading purposes. (1) Working capital, funding the operational cycle. (2) Asset purchase, vehicles, equipment, plant for trading use. (3) Property purchase or improvement for trading use. (4) Inventory or stock purchase. (5) Marketing, training, or development expenditure for the trade. Five common non-trading purposes that reduce or eliminate deductibility. (1) Loan to acquire investment property held for capital appreciation. (2) Loan to pay personal expenses of directors or shareholders. (3) Loan to lend onward to related parties without commercial interest. (4) Loan to repay a director's personal debt to the company (overdrawn DLA). (5) Loan supporting non-business activities or hobbies.
Related-party loan considerations
When the borrower and lender are connected (related companies, family-held businesses, structures involving directors), HMRC scrutinises whether the interest rate is commercial. Below-market or above-market rates trigger transfer pricing adjustments. The safe approach: charge a commercial interest rate (broadly aligned to what an independent UK lender would charge for the same risk profile), document the loan in writing, run interest payments on a regular schedule, and treat the loan as if it were arm's-length. Significant related-party loans typically need transfer-pricing documentation; smaller intra-group loans are usually managed via accountancy practice without formal transfer pricing studies.
Loans with personal-use elements
Where a loan is partly for trading use and partly for non-trading use (e.g. a director takes part of a working-capital loan as personal cash), deductibility splits proportionally. The trading-purpose portion is deductible; the personal-use portion is not, and the personal use may trigger DLA mechanics (benefit-in-kind, S455 tax). Lenders rarely care about this split, it's a borrower-side accounting and tax question. Clean approach: keep loan proceeds in the company bank account and use them only for trading purposes, run personal cashflow separately via salary and dividend.
Interaction with capital allowances
When the loan funds asset purchase, the interest is deductible against trading profit AND the asset typically qualifies for capital allowances (annual investment allowance up to £1m, plant and machinery allowance, structures and buildings allowance, etc.). Both tax reliefs apply alongside each other. For asset finance specifically, the accounting and tax treatment depends on whether the structure is hire purchase (asset on balance sheet, qualifies for capital allowances) or operating lease (asset off balance sheet, rental payments deductible but no capital allowances). Asset finance structuring affects the combined tax position; accountant input recommended.
Recent HMRC focus areas
Three areas HMRC has scrutinised in recent years. (1) Director loan account misuse, where companies fund DLA overdrafts through external borrowing rather than profits. (2) Property investment structures dressed as trading, where the borrowing supports investment property held for capital gain rather than trading rental. (3) International loan structures with non-commercial interest rates, particularly UK-Ltd-to-overseas-parent arrangements where the interest rate doesn't reflect arm's-length pricing. Clean UK SMB trading-purpose lending is rarely affected by these focus areas; complex structures should have accountant and tax counsel input.
FAQ
How do I claim the deduction?
Automatic for trading-purpose loans. The interest expense flows through the P&L into the corporation tax computation as part of normal trading-profit calculation. Your accountant handles it as part of year-end accounts preparation. No separate claim or election required.
Does this apply to my business overdraft?
Yes. Interest on a business overdraft used for trading purposes is deductible on the same basis as any other commercial loan interest. The deduction applies to whatever interest is actually charged across the year, regardless of fluctuating overdrawn balance.
What about arrangement fees?
Arrangement fees are generally deductible but the timing varies: HMRC allows the deduction in the year incurred if the fee is small relative to the loan, or amortised across the loan term if the fee is material. UK accounting standards prefer amortisation; HMRC typically accepts either treatment. Accountant judgement applies.
Does deductibility differ between secured and unsecured loans?
No. The tax treatment is the same regardless of whether the loan is secured against assets or unsecured. The trading purpose is what matters, not the security structure.
Are personal guarantee callouts tax-deductible?
For the company: generally no. PG callouts represent payments by the director personally, not by the company; the company's loan obligation continues. For the director: PG callouts are usually capital losses for personal tax purposes, subject to CGT rules. Specialist tax advice essential on PG callout treatment.
What about Sharia-compliant finance interest?
UK Sharia-compliant finance structures (typically murabaha or ijara) use profit margins or rental payments rather than interest, but HMRC treats the substance as equivalent to interest for trading-purpose deductibility. The deduction applies to the profit margin or rental payment in the same way as conventional loan interest. Documentation of the Sharia structure matters for HMRC clarity.
Reviewed by Oliver Mackman, Director. Last reviewed: 2026-05-11.