Tax Loans: A Smarter Way to Think About Paying Tax

22 Dec Tax Loans: A Smarter Way to Think About Paying Tax

For many business owners, paying tax is seen as manageable… until the bill actually arrives.

Recently, we’ve seen a noticeable increase in businesses seeking help to finance their tax liability and it’s not hard to see why. Tax liabilities are rising, margins are under pressure, and cashflow is tighter than it has been for years. In fact, around one in five UK companies are now concerned about meeting their tax obligations.

But here’s the key question most people don’t ask:

• Is paying tax in one painful lump sum really the smartest way to do it?

What Is a Tax Loan (and Why Are More Businesses Using Them)?

A tax loan allows a business or individual to spread a tax bill over a period of up to 12 months, rather than paying it all at once.

Rather than draining cash reserves in one hit, a tax loan helps you:

• Protect day-to-day cashflow
• Avoid sudden financial strain
• Keep the business running smoothly

Used properly, it’s not about avoiding tax or delaying the inevitable — it’s about matching tax payments to how your business actually generates cash.

Which Taxes Can Be Funded?

In practice, tax loans are commonly used for:

Corporation Tax

• Typically funded over 3–12 months

Personal Tax

• January self-assessment payments spread over 12 months
• July payments on account spread over 6 months

Key point:
Lenders generally prefer to fund tax that is current and due within the same tax year, rather than historic or overdue liabilities.

Making Tax Digital is soon to land, which will allow funders to review tax quarterly, helping businesses stay on top of payments rather than reacting at the last minute.

Why Tax Loans Are not a Sign of Financial Trouble

Tax loans often get a bad reputation but in reality, many strong, profitable businesses use them strategically, not defensively.

Here are some common reasons why.

1. Profitable Businesses Reinvest Their Cash
   Many growing businesses reinvest heavily in:

• New equipment
• Refurbishments
• Expansion

That’s excellent for long-term value, but it can leave less cash available when the tax bill arrives.

Alternative strategy:
Rather than taking a tax loan, it may be possible to refinance recently purchased assets, which can:

• Release cash back into the business
• Spread payments over 3–5 years
• Improve overall cashflow

The right answer depends on the wider picture — not just the tax bill in isolation.

2. Investments May be Better Left in place
   Some clients hold investments that:

• Are performing well
• Would incur penalties or tax if exited early

A tax loan allows them to:

• Keep the investment intact
• Avoid breaking it prematurely
• Potentially benefit if investment returns exceed the cost of borrowing

In some cases, borrowing to pay tax is actually the more financially efficient option.

3. Cashflow Isn’t Linear — Tax Is
   Tax deadlines don’t align neatly with how businesses earn money.

Short-term pressure might come from:

• Seasonal slowdowns
• Higher operational costs
• One-off expenses

A tax loan smooths these peaks and troughs, turning a sharp cashflow shock into a manageable monthly cost.

4. Smarter Dividend Planning
   For higher-rate taxpayers (up to 39% on dividends), tax loans can help:

• Balance personal tax payments
• Avoid over-drawing dividends in one year
• Spread liabilities more efficiently into the next year

Often, it’s about control rather than affordability.

HMRC Time to Pay vs Tax Loans

HMRC does offer Time to Pay arrangements — but they come with limitations.

Some key considerations:

• Other lenders may see an HMRC plan as a risk / red flag
• It can restrict future borrowing or lead to declined applications
• HMRC is a preferential creditor, ranking ahead of most lenders
• Interest and penalties can still apply

In many cases, a tax loan is a cleaner, more flexible, and lender-friendly solution, which helps to keep other finance channels open.

What Does a Tax Loan Look Like in Practice?

Example:

• Loan amount: £50,000
• Term: 12 months
• Monthly repayment: £4,651
• Interest rate: 11.64%

Instead of losing £50,000 of liquidity overnight, the business retains cash for operations, growth, or unexpected opportunities.

Additional Benefits of Tax Loans

Predictable monthly costs
Spreading tax over 6–12 months makes budgeting far easier.

Fast and straightforward
Tax loans are typically quick to arrange:

• Rapid underwriting
• Minimal paperwork (accounts + tax breakdown)
• Funds often in place within days

Keeping cash where it matters
Liquidity provides flexibility — and flexibility has real value.

Part of strategic financial planning
Used proactively, tax loans can support steady cashflow throughout the year rather than reacting under pressure.

Thinking About a Tax Bill Right Now?

If you’ve got a tax payment coming up — or you’re already wondering how the next one will be funded — don’t leave it until the deadline is looming.

A short conversation can help you:

• Understand whether a tax loan is appropriate
• Explore alternatives like asset refinancing
• Compare the true cost of borrowing versus the impact on cashflow
• Avoid last-minute stress or reliance on HMRC Time to Pay

Even if you don’t proceed, you’ll come away with clarity and a plan.

If a tax bill is on the horizon, now is the right time to talk