A Business Loan Is Not Income
So the question comes up a lot, especially once you're running things through a limited company: do you pay taxes on a business loan? Short answer, no. It's not income, so it doesn't touch your profit and it doesn't touch your tax bill. What it does touch is your balance sheet.
Grants and loans get mixed up constantly, and it’s easy to see why, they land in the account looking pretty much identical. Grant money almost always becomes taxable profit though, while loan money just passes through.
What happens instead is simpler than people expect. Cash goes up by whatever you borrowed, and a liability appears next to it for exactly the same amount. Nothing's really changed on the profit side. You’ve just added the same figure to both sides of the ledger.
Repayments are where people get it wrong most. Say two grand leaves the account every month. It feels like an expense because it's leaving, but most of it isn't one. Maybe £1,750 of that is capital, paying the loan down, and that sits on the balance sheet and does nothing to your profit at all. The other £250 is interest, which is the actual cost of borrowing, so that's the bit that comes off your profit. Book the whole two grand as an expense without splitting it and your profit looks smaller than it really is, so the company pays less tax than it owes, but that gap just sits there until someone catches it, and then it comes due, usually with interest on top.
That interest saving is worth a different amount depending on where your profit sits, since corporation tax doesn't sit at one flat rate:
- 19% on smaller profits
- 25% on larger ones
- A stretch in between where the rate climbs past both, which is really the guts of business loan tax for a limited company
So the same bit of interest relief can be worth more to one company than another, purely depending on where their profit lands.
Interest counts as long as the loan went into the business, which for most people is all of it. The costs of setting the loan up count too. Legal fees, brokerage, valuation and search fees connected to it. Early repayment charges are usually fine as well, as long as it's a genuine compensation to the lender for you paying early. That's most of what reduces your tax bill on a loan like this.
Whatever you buy with the money is judged on its own terms. A van goes through capital allowances the same as any other van. Put part of the loan towards something personal and there's a benefit-in-kind problem waiting on top.
If a lender ever writes off what you owe, that isn't automatically good news at tax time, because that write-off usually counts as a taxable credit under the loan relationship rules. There are exemptions if the company's in genuine financial trouble, but they're narrow so this is one to check with an accountant rather than assume.
Director's loans are a separate thing entirely, and the two get confused often. If you take money out of your own company and don't pay it back within nine months and a day of the year end, and the company ends up with a section 455 charge on whatever's still outstanding. 35.75% if the loan's from 6 April 2026 onwards, 33.75% if it's from before then. The company can claim that money back once the loan's repaid, though the refund is slow to come through.
Both of those are exceptions, not the usual shape of a business loan. Take one out, use it for the business, pay it back on schedule, and neither one applies to you.
