There may be times when raising funds through your company isn’t straightforward—especially with tighter lending conditions or delays in accessing business finance. In these situations, some directors or shareholders choose to borrow personally and then introduce those funds into the company, either by lending the money to it or subscribing for shares.
While personal borrowing always comes with its own risks and considerations, it’s important to know that you may be entitled to claim personal tax relief on the interest you pay, provided certain conditions are met.
When Does the Relief Apply?
HMRC allows a deduction for interest paid on personal loans where the money is used for specific qualifying purposes. The two most relevant for owner-managed businesses are:
- Buying ordinary shares in a close company (broadly, one controlled by five or fewer shareholders), or
- Lending money to such a company.
To qualify, you must also be involved in the business—for example, as a director or shareholder (owning more than 5% of the company). The company must also be carrying on a trade, not just holding investments.
How Does the Relief Work?
Say you earn £80,000 a year in personal income and take a personal loan of £100,000 (perhaps secured against your home) to support your company.
If the loan qualifies under HMRC’s rules, let’s say the interest in year one is £5,000, this can be claimed as a deduction against your personal income on your tax return. At a 40% tax rate, that’s a £2,000 saving.
This relief can be claimed annually, as long as the loan remains in place and the qualifying conditions are still met.
The Key Point When Using Personal Funds to Support your Business
We’re certainly not recommending personal borrowing—but if it’s something you’re already considering as a way to support your business, it’s worth being aware that tax relief may be available on the interest. To ensure you can claim it correctly, the structure and purpose of the loan must be clear from the outset.
If this is something you might explore in future, feel free to speak with us first. We’ll help you assess the tax implications and make sure everything is set up correctly.
