Interest on business loans

Conditions

1. Interest on bank and business loans taken out for business purposes is allowable. GOV.UK's self-employed expenses guidance lists 'interest on bank and business loans' as an allowable financial cost (updated November 2024). The key requirement is that the loan must have been raised for a business purpose — purchasing a business asset, funding working capital, or a similar trading need.
2. Only the interest element is allowable — not repayments of the loan principal. Repayments of borrowed capital are not a tax-deductible expense. Where a lender provides a combined statement showing interest and capital, ensure only the interest portion is claimed.
3. Under the cash basis — which has been the default method for unincorporated businesses (sole traders and partnerships) from 2024/25 onwards (BIM72005) — interest is deductible when it is actually paid. The old £500 annual cap on interest under the pre-2024/25 cash basis rules (BIM70040) applied only to tax years up to 2023/24. From 2024/25 the GOV.UK cash basis guidance lists 'interest and bank charges' as allowable costs without a stated cap. If you are amending a return for an earlier year, the old £500 limit may still apply to that year.
4. Under the accruals (traditional) basis, interest is recognised as it accrues, not just when paid. Unincorporated businesses may elect out of the cash basis and use traditional accounting if that suits their circumstances.
5. For a limited company, interest on loans taken out for business purposes is allowable under the loan relationships rules (Part 5, Corporation Tax Act 2009). This is the standard statutory route for company finance costs and is generally allowable for genuine business borrowings.
6. If a loan funds a mix of business and personal purposes — for example, a personal overdraft occasionally used for business expenses — only the business proportion of the interest is allowable. A dedicated business loan keeps the position clean and straightforward.
7. Employees cannot claim interest on personal loans as a tax deduction, even if the loan proceeds were used for work-related spending.

Common mistakes

• Claiming loan repayments (capital) as well as interest — only the interest element is deductible.
• Applying the pre-2024/25 cash basis £500 interest cap for 2024/25 or later years — that restriction applied to tax years up to 2023/24 only.
• Deducting interest on a loan taken out primarily for a personal purpose, even where some business use occurs.
• Missing the interest element embedded within a finance lease or hire-purchase agreement — check with your lender how much of each payment is interest and how much is capital.

What to keep

• Loan agreement showing the principal, the purpose of the loan, and the interest rate.
• Annual statements or payment schedules from the lender showing the interest charged or paid.
• Evidence that the loan proceeds were applied to a business purpose — for example, an invoice for the asset purchased or a bank transfer showing the funds going into the business.

Real-world example

A sole trader takes out a £20,000 business loan to purchase new workshop machinery. The annual interest charge is £1,100. Under the cash basis (the default from 2024/25), the interest paid in the tax year is allowable in full. The repayments of the £20,000 principal are not deductible — the machinery itself is claimed via capital allowances.

Frequently asked

Related allowances