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TAX AND PENSIONS
How could a business loan affect your tax bill?
A business loan is when a business borrows money from a lender. A specific amount of money is agreed upon, alongside a deadline to pay it back with any interest accrued.
For many business owners, a loan can be a lifeline for their ventures to succeed.
However, it’s important to know how taking out a business loan can impact your tax bill at the end of the UK financial year. In this guide, we’ll reveal whether business loans are tax-deductible and how they can affect your business’s overall financial health.
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Is a business loan considered a business cost?
In short, no. A business loan is not considered a business cost in the same way as day-to-day operational expenses. For example, the running costs for an office or factory.
A business loan provides the funds needed for a business to grow or cover expenses, but it’s a financial obligation designed to be paid back to the lender over time. It’s not the same as ongoing costs for running your business, such as salaries, utilities, or rent.
However, there are different rules for the interest payments i.e. the cost of borrowing.
Are my business loan repayments tax-deductible?
The business loan itself is not tax-deductible. For example, if you borrowed £10,000 for your business loan, the £10,000 of borrowed capital would not be tax-deductible.
Typically, interest payments on business loans may be considered tax-deductible under certain conditions. Interest payments are the compensation the lender receives for providing funds to the borrower, helping them make a profit. This means interest payments are considered legitimate business costs.
For instance, if a business borrows £10,000 at an annual interest rate of 8%, there might be potential to deduct the £800 interest from your taxable income for the year, depending on various factors and eligibility criteria.
Remember, this only applies if the loan is for business use – not personal expenses!
Is a business loan classed as taxable income?
No, a business loan is not classed as taxable income, as you have borrowed the money.
When you take out a loan for your business, it’s not treated as profit that you need to pay tax on. It’s treated as a debt that you need to pay back in an agreed amount of time.
Money classed as taxable income is earned by your business from various sources, such as from sales of products or services, or people investing in your company. Once any allowable business expenses are deducted, this is the amount that is taxed by HMRC.
While a loan helps your finances, it is not viewed as income to be taxed or reported on. If you’re paying interest on loans, this isn’t taxable income, but it is still tax-deductible.
It’s important to discern between earning interest (taxable income) and paying interest.
Can I use my business loan to pay my tax bills or VAT?
Yes, you can use a business loan to pay your tax bills or VAT (Value Added Tax).
Nothing is stopping you from using a business loan to cover tax obligations. It’s a financial solution and can be used to meet tax deadlines, avoid penalties and ensure compliance.
If you choose to use a business loan to pay tax bills or VAT, note that the interest on the loan isn’t always tax-deductible. Whether loan interest is tax-deductible depends on how the borrowed funds are used – it has to be used for legitimate business expenses.
Keeping detailed records using business expense software can help keep track of how loan funds are used. You should also plan to take yearly tax payments into account.
What other kinds of interest payments are tax-deductible?
Subject to specific conditions, other types of interest payments are also tax-deductible. Examples of other loans you may be eligible to tax-deductions on include:
Interest for loans used for capital expenditure, e.g. work equipment
Overdraft interest – the interest paid on a business-related overdraft
Credit card interest, for outstanding balances on a business credit card
Interest on various business finance agreements, such as hire purchases
Employee loan interest – in certain circumstances, interest is deductible
Interest paid on any trade credit, such as vendor or supplier financing
Tax regulations are subject to change. The information provided reflects our current understanding and is not exhaustive. It's essential to consult with a tax professional to understand how these principles apply to your unique circumstances.
How can I make my business taxes easier?
By using QuickBooks, you could simplify the management of business loans – helping you keep track of taxes throughout the year and make more informed business decisions.
Categorise Expenses: Software like QuickBooks can help categorise loan-related transactions, ensuring your statements reflect interest payments and capital repayments.
Loan Tracking: Track the outstanding balance of business loans, helping you monitor how much is left to repay and align financial records with loan status.
Automate Repayments: Connect QuickBooks to your bank and set up recurring payment reminders, helping you avoid any potential penalties from your lender.
Detailed Reporting: Save time and stress with comprehensive reporting, including clear income and cash flow statements to show your stakeholders.
QuickBooks is fully compliant with HMRC for VAT and MTD, making it easier to navigate rules around business loans – so you can get on with growing your business.
FAQs
Do you pay tax on a loan from your business?
Tax may be applicable on director's loans, and if you are both a shareholder and a director, your company might also be liable for taxation in certain situations.
Can a company loan money to an individual?
A company can lend money to an individual, like a family member, but it needs proper documentation and shouldn't risk financial instability. However, be aware that lending to a family member might have tax implications, particularly if it's considered a benefit.
Can I lend my limited company money?
As a director, you can lend money to your company. However, it's essential to document the loan properly, and the terms of repayment, including any interest, should be clear.
What if I’m self-employed as a sole trader?
If you are self-employed as a sole trader, you and your business are considered the same legal entity. There is no legal distinction between you and your business, so you technically can't lend money to yourself or your business in the same way a director can in a limited company. You just add funds to your business (and vice versa) as needed.
What’s a business loan arrangement fee?
Arrangement fees in business refer to charges or fees that a lender may impose when setting up a loan for a company, covering the costs of arranging and processing the loan. They are often tax-deductible, as they are considered a legitimate business expense, but this only applies if you pay as interest repayments – not if you pay them upfront.
This content is for information purposes only and should not be considered legal, accounting, or tax advice or a substitute for obtaining such advice or research specific to your business. Additional information and exceptions may apply. No assurance is given that the information provided is comprehensive accurate or free of errors. Intuit does not have any responsibility for updating or revising any information presented herein. Viewers should always verify statements before relying on them.
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