Glossary

Net-of-tax cost of borrowing

The net-of-tax cost of borrowing is a loan’s real cost after allowable interest reduces your corporation tax bill, giving a lower effective rate than the headline.

2 min read

After tax reliefLower than headline

× (1 − tax rate)The rough shortcut

Definition

The net-of-tax cost of borrowing reflects that interest on business borrowing is normally an allowable expense, reducing taxable profit. If you pay corporation tax at 25% and borrow at 12%, the effective cost after relief is roughly 12% × (1 − 0.25) = 9%. It is the honest cost to weigh against a project’s return.

In plain terms

Because the taxman effectively shares part of the interest, the money costs your company less than the sticker rate suggests.

Why it matters for your company

Compare a project’s return against the net-of-tax cost, not the headline rate, for a fair test. Check your rate with the corporation tax calculator. See tax-deductible interest.

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