Severn Accounting
Tax & Accounting

Can i deduct the higher interest costs of my new fixed rate

By Ali Jaw ·

Interest on business borrowing is a legitimate expense for most business owners, and HMRC generally allows you to claim tax relief on it. However, the rules around deducting interest costs have become stricter in recent years, particularly when you’ve refinanced at higher rates. If you’ve recently switched to a fixed-rate mortgage or loan and are now paying more interest, you’ll want to understand exactly what you can and cannot claim.

The General Rule: Interest Relief on Business Debt

The good news is straightforward: if you’ve borrowed money for business purposes, the interest you pay is typically deductible from your taxable profit. This applies whether you’re a sole trader, partnership, or limited company. The interest must be directly related to your business — a loan taken out to buy equipment, fund working capital, or purchase commercial property all qualify.

For the 2024/25 tax year, this remains a core principle under the Income Tax Act 2007. The HMRC doesn’t care whether you’ve fixed your rate at 5%, 6%, or higher; the deduction itself is allowed. What matters is that the underlying debt was taken out for a valid business purpose.

Interest Restriction Rules: Where the Complication Arises

Here’s where it gets trickier. If you’re a limited company or part of a corporate group, the Interest Restriction Rules may apply. These rules limit the amount of net interest expense you can deduct each year. From April 2024, the restriction is broadly capped at 25% of your tax EBITDA (earnings before interest, tax, depreciation and amortisation).

If your refinanced debt pushes you over this threshold, you won’t be able to claim the full interest cost in that tax year. Any excess can usually be carried forward to future years, but you’ll need to monitor this carefully.

The key point: If you’re a sole trader or partnership, these rules don’t apply. You can deduct all business interest costs without restriction. But if you’re operating as a limited company, particularly with significant borrowing, you’ll want to review your position.

Another consideration: if you’ve borrowed from a connected person — perhaps refinancing from a director’s loan or a related entity — HMRC may apply transfer pricing rules. These rules ensure that interest rates between connected parties are at “arm’s length” (what an independent lender would charge).

If your new fixed rate is notably higher than commercial rates, HMRC could argue that only the commercial rate qualifies for relief. This is relatively rare but becomes relevant if you’re borrowing from family members or related businesses at non-commercial rates.

Claiming Your Interest Deduction

For sole traders and partnerships: Report your deductible interest on your Self Assessment tax return. Use the appropriate sections of your return (typically the profit and loss calculation for your self-employment pages). Keep clear records of:

  • Loan agreements and terms
  • Evidence that the loan was for business purposes
  • Proof of interest payments made during the tax year
  • Your lender’s statement showing interest charged

For limited companies: Claim interest as an expense in your Corporation Tax return (CT600). Your accountant will typically handle this, but ensure your loan documentation and payments are clearly recorded in your accounts.

Practical Tips for Refinancing

If you’re considering refinancing or have recently done so at a higher fixed rate, take these steps:

  • Document everything. Keep your loan agreement and evidence of the business purpose clearly on file.
  • Distinguish interest from capital repayment. Only the interest portion is deductible, not repayments of the loan itself.
  • Review annually. Ensure you’re claiming the full allowable amount on each tax return.
  • Consider timing. If you’re a company subject to Interest Restriction Rules, the timing of when you refinance can affect your allowable deduction across tax years.

Conclusion

Rising interest costs are a genuine headache for many business owners, but the tax relief available can provide some offset. For sole traders and partnerships, the deduction is straightforward. For limited companies, particularly those with substantial debt, the Interest Restriction Rules require more careful planning.

The key is keeping meticulous records and understanding whether restrictions apply to your circumstances. Interest rates and tax rules change frequently, so what’s deductible for 2024/25 should be reviewed annually.

For tailored advice, contact Severn Accounting — we’re here to help.