The rule for sole traders

GOV.UK’s list of claimable legal and financial costs includes interest on bank and business loans, hire purchase interest, and bank, overdraft and credit card charges. It also says plainly what you cannot claim: repayments of loans, overdrafts or finance arrangements.

So the monthly payment on a business loan splits in two. The interest part is an expense that reduces your taxable profit. The capital part is you paying yourself back, and it touches nothing.

The rule for companies

A limited company deducts the interest it pays on business borrowing as a cost before Corporation Tax, same idea through a different machine.

The purpose test

The loan must be for the business. Interest on borrowing that funded something personal is not claimable, and a loan that mixes both needs splitting, only the business share goes in. Borrow £20,000, put £15,000 into stock and £5,000 into a holiday, and three quarters of the interest is claimable.

Worked example

A sole trader borrows £10,000 for equipment at a flat 8% and pays £800 of interest this year. They are a basic rate taxpayer paying Class 4 National Insurance.

• Interest claimed: £800
• Tax saved: £800 at 20% = £160
• Class 4 saved: £800 at 6% = £48

The real after-tax cost of that year’s interest is £592. The relief does not make borrowing cheap; it makes it a little less expensive.

Watch for

Using the £1,000 trading allowance. If you claim the allowance instead of actual expenses, you cannot claim loan interest or any other expense on top. For most borrowing businesses the real expenses win, but it is worth checking once.

Sources

All pages checked 20 October 2026.

• Legal and financial costs (self-employed expenses): https://www.gov.uk/expenses-if-youre-self-employed/legal-financial
• Expenses if you’re self-employed: https://www.gov.uk/expenses-if-youre-self-employed
• Tax-free allowances on property and trading income: https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income

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