Recording business loan repayments correctly means splitting each payment in two: the interest is a business expense, and the rest simply reduces what you owe. If you post the whole repayment as a cost, your profit is understated and your balance sheet will never agree with the lender. Here is a month-by-month method that ties your books to the lender's statement, for sole traders and small limited companies alike.
Key takeaways
- Receiving a loan is not income, and repaying the capital is not an expense.
- Only the interest (and certain finance fees) goes to the profit and loss account.
- Use the lender's statement as the source of truth for the interest figure.
- No VAT applies to loan interest or repayments.
What is a loan liability account?
A loan liability account is a balance sheet account that shows how much the business owes a lender at any date. When the loan money arrives, the bank goes up and the loan account goes up by the same amount. Each repayment takes money out of the bank and is split: the capital part reduces the loan account, and the interest part is posted to an expense account such as "Loan interest". If you are unsure where these accounts sit in your software, our guide to the chart of accounts helps.
How each transaction should be posted
| Event | Bank | Loan account (balance sheet) | Profit and loss |
|---|---|---|---|
| Loan paid into the business | Money in | Balance owed increases | No effect |
| Monthly repayment: capital part | Money out | Balance owed falls | No effect |
| Monthly repayment: interest part | Money out | No effect | Interest expense |
| Arrangement fee deducted by lender | Less money in | Depends on treatment; ask your accountant | Usually a finance cost |
A month-end routine for loan repayments
- Set up the loan account once. Create a liability account named after the lender and post the opening amount received.
- Post each repayment from the bank feed as a split. Most software lets you divide one bank line between two accounts. Use your best estimate of interest if you do not yet have the statement.
- Get the lender's statement. At least once a quarter, download the statement showing interest charged and the closing balance.
- Compare balances. The loan account in your books should match the lender's closing balance on the same date. This is the same logic as a bank reconciliation.
- Post a correcting journal for any gap. If your estimates put too little through interest, move the difference from the loan account to interest expense.
- Repeat at the year end. Your accountant will want the closing statement, so add it to your month-end checklist for the final month.
Illustrative example: a café owner's equipment loan
Illustrative example only: the business and all figures are invented. A sole trader running a small café borrows £12,000 on 1 October 2026 to buy a new coffee machine and fit out the counter. Repayments are £370 a month by direct debit. Their year end is 31 March.
The owner posts the October to March repayments (6 × £370 = £2,220) as an expense in their app. In April, the lender's statement shows £520 of interest charged and a balance of £10,300 owing at 31 March 2027.
| Item | As first posted | Corrected |
|---|---|---|
| Interest expense in profit and loss | £2,220 | £520 |
| Loan balance owed on balance sheet | £12,000 (never reduced) | £10,300 |
| Effect on profit | Understated by £1,700 | Correct |
The £1,700 difference is the capital repaid (£12,000 − £10,300). One journal moves it from expenses to the loan account. Without that fix, profit would be understated by £1,700 and too little tax paid. The coffee machine itself is a separate question: it is an asset, and the tax relief comes through capital allowances rather than the loan.
What about tax relief on the interest?
For a sole trader, interest on a loan used wholly for the business is generally an allowable expense. HMRC's expenses guidance for the self-employed lists financial costs such as interest on bank and business loans. Under the cash basis there have been particular rules for interest, so check the current cash basis guidance on GOV.UK if that is how you prepare your figures. For a limited company, interest on borrowing for the trade is generally deductible in arriving at taxable profit. In both cases, the capital repayments are never deductible.
Common mistakes
- Recording the loan as sales. Borrowed money is not turnover. It can also distort your VAT and MTD qualifying income figures if posted as income.
- Expensing the full repayment. As the example shows, profit is understated by the capital repaid.
- Using a VAT code on interest. It is exempt, so nothing should reach your VAT return.
- Mixing personal and business borrowing. A personal credit card used for one business purchase needs its own treatment. Keep a separate business account for business loans.
- Confusing a loan with finance on a vehicle. Hire purchase and leasing are recorded differently from a bank loan, so tell your bookkeeper which you have.
How we can help
We set up loan accounts properly, reconcile them to lender statements and keep the interest figure accurate all year. Bookkeeping starts from £150/month on a fixed fee. See our bookkeeping service, check our pricing, or contact us with your latest loan statement.
Frequently Asked Questions
Is the whole monthly loan repayment a business expense?
No. Only the interest part is a cost of the business. The rest repays the money you borrowed, so it reduces the loan balance on your balance sheet rather than your profit. Treating the full repayment as an expense overstates your costs and understates your tax, which HMRC could later correct with interest.
Where do I find the split between interest and capital?
Your lender's annual or monthly statement normally shows interest charged and the balance outstanding. Online lenders often provide a downloadable schedule. If you only have bank statement lines, ask the lender for a statement covering your financial year so you can post the interest accurately.
Do I pay or reclaim VAT on loan repayments or interest?
No. Lending money is generally exempt from VAT, so there is no VAT on the interest or on the capital repayment. Post loan transactions with no VAT code, or the exempt code your software uses, so they do not appear on your VAT return as if they were taxable purchases.
Is loan interest tax deductible for a sole trader?
Interest on money borrowed wholly for the business is generally an allowable expense. If the loan was partly for private use, only the business share counts. There have been specific rules for interest under the cash basis, so check the current position on GOV.UK or ask your accountant before you file.
How do I record a loan I made to my own limited company?
Money you lend to your company is recorded as a liability in the company's books, usually in the director's loan account. Repayments to you reduce that balance and are not taxable income for you. If the company pays you interest, that interest is handled differently, so keep a written loan agreement.
Related reading
How Berber Accounts & Tax helps
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Schedule a consultation →Written by the Berber Accounts & Tax team, 124 City Road, London EC1V 2NX, United Kingdom.
Last reviewed: 2 November 2026.
This article is general information, not personal tax advice. Speak to a qualified accountant about your own circumstances before acting on it.