Some business owners treat the interest rate on a hire purchase agreement as almost an afterthought, because the interest is tax-deductible. The logic goes: “the taxman’s paying part of it anyway, so why haggle.” That logic is wrong, and it’s an expensive mistake to make on kit that can run to tens of thousands of pounds.
Relief on HP interest is real — for a limited company it reduces the corporation tax bill, for a sole trader it comes off taxable profit — but it only ever refunds a slice of what you’ve paid, not the whole thing. A limited company paying corporation tax at 25% gets back 25p of every £1 of interest; the other 75p is still gone. A sole trader on the higher rate gets back 40p in the pound; on the basic rate, just 20p. Either way, the majority of the interest cost stays a real cost. A 2% higher rate on a £40,000 machine over five years isn’t a rounding error the tax system quietly absorbs — most of it lands on you regardless of your tax position.
The capital cost of the asset is a separate matter entirely, usually covered in full and immediately through the Annual Investment Allowance, so that side of the deal is often close to tax-neutral in year one. It’s specifically the interest — the actual price of borrowing — where relief is only ever partial, and that’s precisely the part some business owners stop scrutinising once they hear the word “deductible.”
None of this means relief isn’t worth claiming — it absolutely is, and it should be factored into the true comparison between finance options. But it’s a modest discount on the cost of borrowing, not a reason to accept the first rate offered or skip comparing providers. The rate deserves the same scrutiny you’d give the purchase price itself.
Are you comparing HP rates as carefully as you compare the price of the equipment — or letting “it’s deductible” close the conversation early?