Tax loans: how to finance your tax bills for your business

Running your own business requires juggling a range of expenses, such as utilities, payroll and inventory, many of which change regularly depending on demand, market conditions and economic factors. That means having available capital when it’s time to pay your tax bill can be a challenge, which is why many businesses turn to tax loans to ease the burden and avoid costly penalties.

We discuss the use of tax loans and how they can help you manage cash flow and meet your tax obligations effectively. 

What is a tax loan?

A tax loan is a short-term business loan designed specifically to help companies pay their tax bills. Instead of depleting your cash reserves with a single payment, a tax loan allows you to make smaller, more manageable payments over time, typically up to 12 months or even longer, depending on the lender​​.

These handy finance solutions let you spread the cost of tax liabilities and preserve working capital for everyday expenses, investments and other commitments.

Is a tax loan the same as an HMRC Time to Pay (TTP) arrangement?

No. While both involve spreading the cost of corporate tax bills over a number of instalments, rather than paying everything at once, Time to Pay arrangements are arranged directly with HMRC and are usually agreed when a business is struggling to pay their bill on time and wants to avoid tax penalties. A tax loan is capital borrowing that enables you to cover what you owe to the government and pay it back in manageable monthly repayments.

Learn more about TTP arrangements and how they differ from tax loans in our dedicated article: HMRC Time to Pay Arrangements or Business Loans: How to Pay Your Tax Bill.

Is it better to pay tax directly to HMRC or take out a loan to cover tax bills?

While filing your tax returns promptly and paying your bills on time is good practice, there are always instances when other expenses and liabilities impact cash flow when it’s time to make tax payments. So, using business finance to give you access to additional capital to cover what you owe HMRC is useful for preventing tax obligations from disrupting operations and causing cash flow problems. 

HMRC offers TTP arrangements for businesses having difficulties paying their tax bills on time, with repayment plans for VAT, Self-Assessment and PAYE. As with loans, this includes interest on money owed. While helping you avoid penalties, it can see obligations build up, meaning pressure again when the next tax bill is due. However, you can negotiate with HMRC to consolidate debt. 

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What types of business taxes can I use a tax loan to pay?

Businesses of all types use tax loans to manage cash flow and meet tax obligations without disrupting day-to-day operations​​. You can use these loans to pay various business taxes, such as:

• Corporation tax: If your business has just received a large corporation tax bill, a tax loan can help spread the payment over 6 to 12 months, reducing the impact on your cash reserves​.
• VAT bills: When it comes to paying VAT, deadlines can often creep up on you, and if your business doesn’t have sufficient cash set aside, a VAT loan can cover the payment while you continue to operate.
• Income tax: Sole traders and company directors often find themselves owing large sums of income tax. A tax loan provides the flexibility to cover this without needing to draw from personal or business savings​.
• Unexpected tax assessments: If HMRC issues an unexpected or higher-than-anticipated tax bill, a tax loan can provide quick relief, helping you pay the bill on time without incurring extra costs.

How do tax loans work?

Tax loans work much like other finance options, and can come in the form of unsecured loans or secured loans, depending on your circumstances. They’re usually unsecured due to the short-term nature of the financing and for smaller amounts. 

The typical tax loan process is as follows:

1. Application and approval: Applying for a tax loan is usually fairly simple, with many lenders offering online applications. Approval times vary, but some lenders make decisions within 24 hours, ensuring you receive funds quickly​.
2. Release of funds: Once approved, the loan is either deposited into your business account or paid directly to HMRC, depending on the lender​.
3. Fixed repayments: Tax loans typically come with fixed monthly payments, making it easy to budget for the expense and avoid surprises.
4. Flexibility: Some lenders, including iwoca, offer loan flexibility, including the option to repay money owed early without additional fees, giving you more control over your finances​ if you want to avoid extra interest.

Who provides tax loans in the UK?

Tax loans are typically provided by alternative business finance providers and digital lenders, rather than high-street banks and traditional brokers. Most tax loan providers, like Funding Circle, Capify and iwoca, offer business loans aligned with your tax needs, such as the amount owed, your cash flow and time required to pay back the capital. 

How does a corporate tax loan differ from a standalone business loan?

The main difference is that tax loans serve a specific purpose, as they enable you to pay off your tax bill and spread the costs across a pre-agreed number of instalments. A business loan, such as iwoca’s Flexi-Loan, offers a lump sum of capital to use for an array of business purposes, beyond covering tax due, with more flexibility of use and tailored repayment terms.

As business loans are for a broader range of finance needs, you can choose from short-term or long-term solutions, secured or unsecured loans or lines of credit, where you only pay interest on the funds you draw down.

How to choose the right loan for spreading the cost of your tax bill

Whether you want a specific tax loan or a broader business loan to cover your tax obligation and provide working capital for other expenses and needs, you need to consider the following questions before making a choice:

• How temporary are your funding needs?
• How quickly did you need the funds?
• Do you want to use the capital for more purposes in addition to meeting your tax obligations?
• Do you need the flexibility to repay the loan early if your circumstances change and cash flow eases? 
• What is the total cost of borrowing with different tax loan solutions?

This will give you a good basis for decision-making when comparing loan options and providers.

How iwoca can help with tax loans

At iwoca, we’ve helped over 120,000 businesses keep their operations running smoothly and invest in their future. Our short-term loans enable you to borrow between £1,000 and £1,000,000, with no collateral required, to use for any business purpose, including VAT, corporation tax, or other liabilities.

Here’s an overview of the key benefits of iwoca’s flexible business loans:

• Quick access to funds: Apply in minutes, get a decision within 24 hours and receive funds just hours after approval.
• Flexible repayment terms: Borrow from just a few days right up to 60 months, with the option to repay early free of charge.
• No unnecessary paperwork: We look beyond the credit score, focusing on business plans, performance, revenue potential and other factors.
• Keeping your business moving: With a loan from iwoca, you can cover your tax bill while maintaining the working capital needed to grow your business.

Whether you’re dealing with VAT, corporation tax, or an unexpectedly high tax bill, iwoca’s flexible, fast financing solutions make it easier to keep your business moving forward without the stress. Apply for Flexi-Loan now or find out how much you could borrow with our business loan calculator.

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