Can sole traders claim bank charges and interest as expenses?

If you’re self-employed, bank charges can be claimed as business expenses if they relate solely to your trade and not to your personal spending.

In this guide, we explain which bank charges and interest a sole trader can claim.

When those costs are allowable, when they are not, and how to record them properly on your tax return.

You can also read our main guide to expenses at what business expenses can you claim as a sole trader?.

What counts as a bank charge?

Bank charges are the fees a bank or payment provider takes for providing banking services.

In practice, you will usually see some combination of:

• monthly account fees
• charges for payments in and out
• cash handling fees
• international payment and currency conversion fees
• overdraft arrangement fees and overdraft charges
• fees for extra cards, cheque books, or replacement cards
• failed payment charges and returned item fees

If you are trying to reduce these in the first place, see how to reduce your business bank charges.

The core rule HMRC applies

HMRC applies the “wholly and exclusively” rule to business expenses.

In plain terms, for an expense to be tax-deductible, it must be incurred solely for business purposes, not personal reasons, and you should be able to prove why it is a business cost.

That is usually straightforward when you have a dedicated business account, and the charges relate to business transactions only.

It becomes more complicated when you use a personal account for everything, or when borrowing is partly personal and partly business.

If you are still using a personal account, we recommend you read these guides:

• do you need a separate bank account for your business?
• can you use a personal bank account for your business?

Bank charges you can usually claim

Most routine business banking costs are allowable.

Some typical examples include:

• monthly business account fees
• bank charges on business payments (including UK transfers and international payments)
• business debit card and credit card charges
• overdraft fees and overdraft charges, where the overdraft supports business cash flow
• fees charged by payment processors and card providers

Card processing fees are sometimes treated by software as “merchant fees” rather than “bank charges”, but for a sole trader, they are still usually allowable if they are part of taking payment from customers.

If you are choosing hardware or payment apps, read card readers and taking card payments.

Interest: what you can claim and what you cannot

Interest often causes more confusion than bank fees, mainly because people confuse it with repayments.

In general, interest on business borrowing is an allowable expense. That includes:

• overdraft interest on a business overdraft used for trading cash flow
• interest on business loans used to fund trading costs or business assets
• hire purchase interest and similar finance charges (where applicable)

What you cannot claim is the capital repayment itself.

Repaying the loan is not an expense in the same way. It is just paying back the money you have borrowed.

Mixed use: when you must apportion

Many self-employed people can run into problems when they mix personal and business costs.

A common example is a personal bank account used for both household spending and business. The bank fee is a single charge, but the account contains both personal and business transactions.

In that situation, you should only claim the business proportion of the charges and interest, based on a reasonable method you can explain if asked to later. For example:

• a percentage based on the number of business transactions
• a percentage based on the value of business transactions
• a simple monthly split where only certain months relate to trading

Unfortunately, HMRC does not have a simple formula to work out a fair apportionment. What matters is that you make a consistent approach and can easily explain how you worked out the split.

What about interest you receive?

Some current accounts pay interest on positive balances. If you receive interest, it is generally taxable income.

This is because interest received increases your profits.

In practical terms, most business accounts pay little or no interest, but if it does appear on your statements, record it and include it in your figures. Accounting software will usually pick it up automatically if the feed is connected.

How to record bank charges properly

For bank charges and interest payments, it is usually simple to document the transactions from bank statements and loan agreements.

• keep your bank statements (digital copies are fine)
• keep loan agreements and finance documents
• label unusual charges so you remember what they were for
• if an account is mixed personal and business, keep a note of how you calculated the business share

You don’t need to submit any statements of proof with your tax returns, but you need to keep accurate records.

If you are getting ready for digital record keeping, see Making Tax Digital for the self-employed and bookkeeping for sole traders.

Common mistakes that trigger problems

• Claiming everything on a personal account. If the account is clearly mixed, it’s hard to justify claiming 100% of the charges.
• Claiming loan repayments rather than interest. Interest is usually allowable, but the repayment is not.
• Forgetting payment processor fees. They often sit outside “bank charges” in your software, but they are still a cost of doing business.
• No narrative for the borrowing. If you are paying significant interest, keep the paper trail that shows what the borrowing funded.

Where do these expenses go on your tax return?

Bank charges and interest fall under the “financial costs” category of allowable expenses. It is one of those categories that is easy to overlook because the amounts feel small month to month, but over a year, the total can be meaningful.

For more on expenses – how different costs are treated for tax purposes, read our sole trader expenses guide.