Interest: what you can claim

Borrowing costs money, and the interest you pay on money used for the business is deductible. The trap is simple and very common: monthly repayments mix interest with capital, and only the interest counts as a business expense.

What you can claim

• Interest on a business loan — a £10,000 loan at 8% costs roughly £800 in the first year.
• Overdraft interest — on your business account.
• Interest and finance charges on hire purchase agreements — the finance element only.
• Interest on a personal loan — to the extent the borrowing funded the business.
• Interest and charges on a business credit card — for business purchases.
• Loan arrangement and broker fees — the cost of setting up business finance.
• Interest charged under a finance lease — on equipment leases.

What you can't claim

• Capital repayments — the part of each payment that pays back the loan itself.
• Interest on personal borrowing — a loan taken for a family holiday.
• Your home mortgage interest — other than any business-use share handled under Use of home.
• Interest on unpaid tax — HMRC's late payment interest is never deductible.

Common mistakes

Logging the full monthly repayment is the classic error. A £250 monthly payment on a £9,000 loan might be £40 of interest and £210 of capital in the early months — only the £40 is an expense. Claim £250 and you have overstated your costs by £210 every single month, and every quarterly update has been wrong.

Hire purchase agreements cause the same problem with extra paperwork. Your HP statement shows the interest and capital split for each instalment — use it, and keep it with your records. An interest-free HP deal makes life easier still: there is simply nothing to claim here.

The final mistake is not asking for the annual interest breakdown in the first place. Lenders produce it in minutes, and it is the one document that proves your figures if HMRC ever asks how you calculated them.

How to record it in your MTD tracker

Select Interest and enter only the interest element of each payment, noting which loan it relates to. Keep the lender's annual statement showing the split, and record bank charges separately in the financial charges category.