How to Fund Your Limited Company Tax-Efficiently

Lenders and investors decide on the strength of your business plan, so write one with realistic forecasts before you ask for money. Then match the finance to the need: your own savings, family loans, bank debt, peer-to-peer lending, grants or equity investors. Each route has different tax consequences, so compare them before you sign.

Interest on a business loan or overdraft is deductible if the borrowing is wholly for the business. So are the incidental costs of raising it: arrangement and commitment fees, broker fees, legal costs, valuation and search fees and guarantee commissions. Example: a company borrows £50,000 at 7% and pays a £750 arrangement fee. If it pays corporation tax at 25%, relief on the £3,500 interest and the fee is worth £1,062.50 in the first year.

If you take a personal loan or extend your mortgage to lend money to, or buy ordinary shares in, your close company, you can usually claim income tax relief on the interest. You need at least 5% of the shares, or some shares plus working mostly in the management of the company. Most family companies are close companies. The relief falls within the cap on certain income tax reliefs, which is the greater of £50,000 and 25% of your income.

Interest relief is denied if the company uses your new loan simply to repay money you lent it earlier. Example: a director lent his company £40,000 from savings, then remortgages his home to lend it another £40,000 so it can repay him for a house extension. HMRC sees the money going round in a circle and refuses relief.

The Seed Enterprise Investment Scheme lets a young company raise up to £250,000. The company must be under three years old, have fewer than 25 full-time equivalent staff and gross assets under £350,000, and carry on a qualifying trade. Investors get 50% income tax relief on up to £200,000 a year, and can exempt half of a capital gain reinvested in SEIS shares. Shares must be held for three years.

From 6 April 2026 a company can raise up to £10 million a year under the Enterprise Investment Scheme (£20 million for knowledge-intensive companies), within a lifetime cap of £24 million (£40 million). Gross assets must be no more than £30 million before the issue and £35 million after, with fewer than 250 employees. Investors get 30% income tax relief on up to £1 million a year (£2 million where the excess goes into knowledge-intensive companies). First investment must come within seven years of the first commercial sale.

VCTs invest in small, unlisted, higher-risk trading companies. Investors get 20% income tax relief on up to £200,000 a year. Your company must have a UK permanent establishment, gross assets of no more than £30 million, fewer than 250 employees and be within seven years of its first commercial sale. Ask HMRC for advance assurance before you pitch; it gives investors confidence.