Summary of which business debt to pay off first
- Rank debts by what they cost and by what happens if you fall behind.
- Overdrafts and credit cards usually cost the most, so they usually come first on cost.
- HMRC charges 7.75% on late tax. If you cannot pay in full, GOV.UK says to contact HMRC about a payment plan.
- In the example, clearing the highest rate first saves £1,950 a year against £900 for the biggest debt first.
- Settling a £6,000 HMRC debt first would save £1,425 a year, which is £525 less. That is the price of dealing with the tax debt.
- An overdrawn director's loan can bring a company tax charge of 35.75%, due nine months and one day after the year end.
Most owners carry more than one debt, such as an overdraft, a card, a loan and a tax bill. Spare cash can only clear one of them at a time. The order you choose changes how much interest you pay.
The rates in the examples are assumptions chosen to show the method, apart from the HMRC rate and the director's loan charge, which come from GOV.UK. Use your own rates.
How do you rank business debts?
Use two tests, and look at them together.
- What it costs. The rate you pay, or the charge you face. A debt at 24% costs more each year than the same amount at 9%.
- What happens if you fall behind. Some debts have stricter consequences than others. Tax owed to HMRC and an overdrawn director's loan both need a plan.
A secured loan or one with a personal guarantee carries extra weight, because missing it puts an asset or your own money at risk. Read your agreement to see what yours says.
What does each business debt cost?
This table puts the debts on the same footing, as the cost of owing £1,000 for a year.
| Debt | Rate used | Cost of £1,000 over a year | Note |
|---|---|---|---|
| Tax paid late to HMRC | 7.75% | £77.50 | Bank Rate plus 4 points, from 9 January 2026 |
| Business credit card | 24%, assumed | £240 | Check the rate on your own card |
| Overdraft | 18%, assumed | £180 | Check the rate on your own account |
| Term loan | 9%, assumed | £90 | Fixed or tracker, check for early repayment charges |
| Overdrawn director's loan | 35.75% tax charge | £357.50 once | Paid by the company, limited companies only, relief when repaid |
The HMRC rate is Bank Rate plus 4 percentage points, and GOV.UK shows 7.75% from 9 January 2026. It moves when Bank Rate moves, which our Bank Rate article explains.
What does the order cost in pounds?
Take an owner with £10,000 of spare cash and four debts. A £30,000 term loan at 9%, a £5,000 overdraft at 18%, a £4,000 credit card at 24% and £6,000 of VAT owed to HMRC at 7.75%. The cash could clear one debt or part of another.
Worked example
£10,000 of spare cash and four debts totalling £45,000
Biggest debt first
- Paid off
- £10,000 of the £30,000 loan
- Rate saved
- 9%
- Interest saved a year
- £900
£900 interest saved a year
Highest rate first
- Card cleared, 24%
- £4,000, saves £960
- Overdraft cleared, 18%
- £5,000, saves £900
- Rest to the loan, 9%
- £1,000, saves £90
£1,950 interest saved a year
£1,050 a year more saved by clearing the highest rate first. Apart from the HMRC rate, the rates are assumptions chosen to show the method
Putting the cash against the biggest debt feels like progress, but it saves the least. Of the loan, overdraft and card, the loan has the lowest rate, so each pound there saves 9p a year. A pound against the card saves 24p.
Where does HMRC sit?
Many guides put HMRC first. GOV.UK says that if you cannot pay a tax bill in full you may be able to set up a payment plan in instalments. HMRC checks whether the plan is affordable, and if you cannot agree one, it asks you to pay the amount in full. Contact HMRC before the deadline rather than after it.
The cost of putting HMRC first depends on the rates. Here is the same £10,000, this time used to settle the £6,000 of VAT and the card.
Worked example
The same £10,000, with £6,000 owed to HMRC at 7.75%
Highest rate first
- Card cleared, 24%
- £4,000, saves £960
- Overdraft cleared, 18%
- £5,000, saves £900
- Rest to the loan, 9%
- £1,000, saves £90
- HMRC debt
- £6,000 still owed
£1,950 interest saved a year
HMRC first
- HMRC cleared, 7.75%
- £6,000, saves £465
- Card cleared, 24%
- £4,000, saves £960
- Overdraft
- £5,000 still owed
- Loan
- £30,000 still owed
£1,425 interest saved a year
£525 a year less interest saved. That is the price of settling the HMRC debt in this example
In this example the owner gives up £525 a year of interest savings in return for settling the tax debt. If the owner cannot settle it and the cash goes to the card and overdraft, a payment plan is the way to keep HMRC dealt with. Ask HMRC whether interest keeps building under the plan, and check the plan terms with your accountant.
What about a director's loan?
This applies only to limited companies. If a close company lends money to a director who is also a shareholder, the company can owe a tax charge on the loan. GOV.UK shows the charge as 33.75% for loans made from 6 April 2022 and 35.75% for loans made from 6 April 2026.
On a £10,000 loan made now, that is a charge of £3,575. The toolkit on GOV.UK says the charge is due nine months and one day after the end of the accounting period in which the loan arose. The company receives relief when the loan is repaid, and the date of repayment changes how and when that relief arrives. This is a point to settle with your accountant before the year end.
The charge is not interest, so it does not fit the table above neatly. It is a large one-off cost, which is why an overdrawn director's loan needs attention before the year end.
Is it worth paying a loan off early?
Check the agreement first. Some loans carry an early repayment charge, which can wipe out the interest you would save. A loan at a lower rate than your overdraft or card is normally paid off after them.
Do not spend all your cash on debt. If a customer pays late and you have no cash, you may end up borrowing again at a higher rate. Our cash reserve article shows how many months of free cash to hold.
What should an owner do this month?
- List every debt with its balance and its rate. Include HMRC and any director's loan.
- Work out the cost of each in pounds a year. Multiply the balance by the rate.
- Contact HMRC about any tax you cannot pay in full. Do it before the deadline and ask about a payment plan.
- Put spare cash against the highest rate you can clear. Check for early repayment charges first.
- Keep your cash reserve. Do not spend it all on debt.
Debt costs come straight off profit, so the Grow profit page covers ways to bring more in. The Save tax page covers ways to keep more of it. You can see how similar businesses near you are doing with our free competitor report, and the IQ Money calculators let you put your own figures into the sums.
Questions owners ask
Which business debt should I pay off first?
Rank debts by two tests, what each costs you and what happens if you fall behind. High cost debts such as overdrafts and credit cards come first on cost. Tax owed to HMRC needs a plan on consequence, so contact HMRC before you miss a deadline.
Should I pay HMRC before other creditors?
GOV.UK says to contact HMRC if you cannot pay a tax bill in full. HMRC checks whether a payment plan is affordable and, if no plan is agreed, asks for the full amount. Late tax also attracts interest, which is 7.75% from 9 January 2026.
What interest does HMRC charge on late tax?
HMRC charges Bank Rate plus 4 percentage points on tax paid late. GOV.UK shows 7.75% from 9 January 2026. The rate moves when Bank Rate moves.
What is the tax charge on an overdrawn director's loan?
If a close company lends money to a director who is a shareholder and the loan is still outstanding at the end of the accounting period, the company may owe a tax charge. It is 35.75% of the loan for loans made from 6 April 2026 and 33.75% for loans made from 6 April 2022 to 5 April 2026. It is due nine months and one day after the end of the accounting period.
Does this apply to a sole trader?
Overdrafts, cards, loans and HMRC tax all apply. The director's loan charge applies only to limited companies, because a sole trader and the business are the same person.
Is it worth paying off a loan early?
It can be, but check the agreement for an early repayment charge first. A loan at a lower rate than your overdraft or card is usually paid off after them, and you should keep enough cash to cover your usual costs.
Should I use my cash reserve to clear debt?
Not all of it. Debt costs a known rate, but running out of cash can force you into more expensive borrowing. Our cash reserve article shows how many months of free cash to hold.
Keep reading
Sources
- HMRC interest rates for late and early payments (GOV.UK). The 7.75% late payment rate from 9 January 2026.
- If you cannot pay your tax bill (GOV.UK). Payment plans and contacting HMRC.
- Close companies, loans to participators (HMRC manual, GOV.UK). The 33.75% and 35.75% rates.
- Supplementary pages CT600A (GOV.UK). How repayment and relief are reported.
- Directors' loan accounts toolkit (GOV.UK). The nine months and one day due date.
This article is general information for owners of UK businesses. The interest rates in the examples, apart from the HMRC rate, are assumptions chosen to show the method, and your own will differ. Rates and tax charges change. It is not tax, legal or financial advice. Speak to a qualified adviser about your own circumstances.
