Are Business Loans Tax Deductible?

Are Business Loans Tax Deductible? What Every UK Business Owner Should Know

If you’re a business owner in the UK, you’ve probably asked yourself this question: “Are business loans tax deductible?” It’s a common query. And for good reason. Understanding the tax implications of borrowing could save you thousands.

Short answer? Business loans themselves are not tax deductible. You can’t claim the loan amount as an expense because it’s not technically a cost—it’s borrowed capital that you’re expected to repay. However, the interest and associated costs of taking out that loan? That’s where the good news starts. Things like loan interest, arrangement fees, and even broker charges can often be deducted as legitimate business expenses. These deductions reduce your taxable profit, which in turn lowers your overall tax bill.

So, while the loan itself isn’t deductible, the cost of borrowing certainly can be.

Why This Question Matters

Running a business is expensive. Whether you’re growing, surviving, or starting out, every penny counts.

So when you consider a loan, you want to know:

• Will it eat into my profit?
• Can I offset any part of it?
• How does it affect my year-end tax bill?

The answers might surprise you—and help you make smarter financial choices.

Let’s Clear Something Up First

Many people confuse a loan with an expense, and it’s an easy mistake to make. After all, both involve money moving in and out of your business. But here’s the important distinction: a loan is borrowed money you’re expected to pay back, while an expense is a cost that’s gone for good.

This confusion often leads to business owners assuming they can deduct the entire loan amount from their taxable profits. Unfortunately, that’s not how HMRC sees it. The only part of a loan that’s potentially tax deductible is the cost of borrowing—things like interest and fees—not the loan itself. Understanding this difference can save you time, stress, and some awkward conversations with your accountant.

Here’s the truth:

• Loan repayments (the principal) are not deductible.
• Loan interest and fees often are.

In other words, you can’t deduct the actual money you borrow. But you can deduct what it costs to borrow that money.

That means:

• Interest payments
• Loan arrangement fees
• Broker fees (if they were part of arranging the loan)
• Early repayment penalties (in some cases)

All of these might reduce your tax bill.

What Kinds of Loans Qualify?

Almost any loan that your business takes out for business reasons can qualify for deductions on interest and fees.

This includes:

• Business loans (secured or unsecured)
• Asset finance agreements
• Hire purchase contracts
• Working capital loans
• VAT and tax loans

Just make sure the funds are being used wholly and exclusively for business purposes. That’s HMRC’s golden rule.

Read more on HMRC allowable expenses.

Examples: What Can You Deduct?

Let’s put it into perspective.

1: Working Capital Loan
You borrow £50,000 over 2 years. You pay £5,000 in interest and fees. That £5,000 is tax deductible.

 2: Asset Finance for Equipment
You purchase a delivery van via asset finance. You pay monthly instalments, and £2,000 goes toward interest. That £2,000 is tax deductible.

3: VAT Loan
You use a short-term loan to cover a large VAT bill. You pay a £500 arrangement fee. That fee is tax deductible.

Every example shows how borrowing can be smart—if you know how to work it.

What Isn’t Deductible?

HMRC is clear about one thing:

You cannot deduct repayments of the principal. That’s just returning borrowed money.

Also, any loan used for non-business purposes (like a personal vehicle or family holiday) will be rejected for deductions.

So make sure to:

• Keep clear records
• Separate business and personal finances

And when in doubt? Ask your accountant. Or give us a ring.

What About Credit Cards and Overdrafts?

Good question.

If your business uses a credit card or overdraft for operational costs, the interest is usually tax deductible.

Again, the rule is simple:

Was it spent on the business? Then the interest is likely deductible.

Does the Loan Type Matter?

Yes. It can.

For example:

• With hire purchase, some agreements allow you to deduct part of the cost of the asset too.
• With equipment leasing, monthly payments may be fully deductible.
• With merchant cash advances, fees are often high—but still potentially deductible.

Knowing the right loan for your needs can make a big difference come tax time.

Why This Matters for Your Cash Flow

Cash flow isn’t just important, it’s everything. It’s the fuel that keeps your business running, your team paid, and your plans in motion. Without strong cash flow, even the most promising business can stumble. That’s why understanding how loans, interest, and tax deductibility affect your day-to-day finances is so important. Because at the end of the day, it’s not just about what you borrow—it’s about what you keep flowing through the business.

If you borrow to invest, you want to know:

• Will I be taxed more?
• Or will this reduce my tax bill?

When used wisely, loans with deductible interest can:

• Improve your cash flow
• Allow bigger investments sooner
• Keep you competitive

Your accountant should factor this into your strategy. So should your broker.

How to Maximise the Benefits

Here’s how you can make the most of it:

1. Work with a broker who understands your business.
2. Track interest and fees separately from loan principal.
3. Use the funds strictly for business use.
4. Talk to your accountant about how to categorise your repayments.
5. Don’t ignore smaller loans—even short-term cash flow support might have tax benefits.

How First Oak Capital Can Help

You’ve got better things to do than spend hours decoding tax law. And frankly, you shouldn’t have to tackle finance jargon on your own.

That’s where we come in.

At First Oak Capital, we go beyond ticking boxes. We’re not just brokers—we’re people who genuinely care about your business journey. We take the time to get to know you, your goals, and what’s holding you back.

From there, we match you with finance options tailored to your needs. We break down how each choice might impact your tax situation. And most importantly, we keep things moving—fast, clear, and honest.

You won’t be left on read. You won’t be bounced around. And you won’t be pressured into anything that doesn’t make sense for your business.

So whether you’re planning to grow, invest in new equipment, or just smooth out cash flow, we’ll help you find the right solution—and explain how it fits into your overall financial picture.

Ready to borrow smarter?

Click here to apply now or speak to one of our friendly brokers today.