After-Tax Cost of Debt Calculator
Calculate the after-tax cost of debt for corporate financial analysis.
What this calculator does
This calculator converts a nominal borrowing rate into its after-tax equivalent — the real cost of debt once corporation tax relief on interest is taken into account. Enter the loan amount, the nominal rate, the fees, the term, and the applicable tax rate, and it returns the after-tax cost of debt alongside the nominal rate and the fee-inclusive APR.
The calculation is a single multiplication, but the figure it produces sits at the centre of UK corporate finance. It is the debt component of a weighted average cost of capital, the discount rate in most lease-versus-buy work, and the correct basis for comparing borrowing against using retained cash.
When to use it
Use it in investment appraisal, where the return on a project must be judged against the genuine cost of funding it. At a 25 percent corporation tax rate, the after-tax cost is a quarter below the coupon, which is enough to change the answer on marginal projects.
It is also central to the buy-to-let structuring question that has occupied UK landlords since Section 24. An individual landlord now receives only a basic-rate tax credit on finance costs, while a limited company deducts interest in full against corporation tax. Running the same mortgage rate at a 0 percent effective relief rate and at 25 percent shows exactly what that structural difference is worth.
Understanding the inputs
Loan amount and nominal interest rate come from the facility. Total loan fees feed the APR figure rather than the after-tax calculation, so include arrangement and broker fees there if you want the all-in view.
Tax rate is the input that does the work. Use 19 percent for a company with profits under £50,000, 25 percent above £250,000, and your effective marginal rate in between — the marginal relief band produces an effective rate above 25 percent on that slice of profit. For an individual landlord, the effective relief is 20 percent regardless of your tax band. For personal borrowing, enter zero.
How is this calculated?
After-Tax Cost of Debt = Interest Rate × (1 − Tax Rate). The tax shield reduces the effective cost of debt.
A worked example
Take a £400,000 commercial facility at 7.5 percent held by a company paying the 25 percent main rate of corporation tax. Annual interest is £30,000. That reduces taxable profit, saving £7,500 in tax, so the real cost is £22,500 a year — an after-tax rate of 5.63 percent rather than 7.5 percent.
The same borrowing in a smaller company paying the 19 percent small profits rate has an after-tax cost of 6.08 percent, saving £5,700. And the same £400,000 borrowed personally by a higher-rate landlord attracts only a 20 percent basic-rate credit, giving an effective cost of 6 percent — worse than either company, on identical borrowing.
Limitations and assumptions
The formula assumes interest is fully relievable in the year it is incurred and that there is taxable profit to relieve. The corporate interest restriction, loss carry-forward limits, and the unallowable purpose rules can all reduce or defer the benefit, and none of them are modelled here.
It uses a single flat rate and ignores the marginal relief calculation between £50,000 and £250,000 of profit, the different treatment of landlords under Section 24, and the financial risk that gearing brings — which the tax shield does nothing to offset. Treat this as a first figure and take advice from an accountant on your actual structure.
Common Questions
- What is the after-tax cost of debt?
- The interest rate adjusted for the corporation tax relief that interest generates. Because interest is deductible as a business expense, HMRC effectively bears part of the cost. The formula is the rate multiplied by one minus the tax rate, so 7.5 percent at a 25 percent corporation tax rate becomes an effective 5.63 percent.
- What corporation tax rate should I use?
- Since April 2023 the UK has had a 19 percent small profits rate for profits up to £50,000 and a 25 percent main rate above £250,000, with marginal relief tapering between the two. Use your effective rate rather than the headline, since a company sitting in the marginal band faces a higher effective rate than 25 percent on that slice.
- Is business interest always deductible in the UK?
- Generally yes for trading companies, subject to the corporate interest restriction, which caps net interest deductions at 30 percent of tax-EBITDA for groups with more than £2 million of net interest expense. Below that threshold most companies get full relief. Anti-avoidance rules such as the unallowable purpose test can also apply.
- How are landlords treated on mortgage interest?
- Very differently since the Section 24 changes fully phased in by 2020. Individual landlords no longer deduct finance costs from rental income; they receive a basic-rate tax credit at 20 percent instead. A higher-rate taxpayer therefore gets relief at 20 percent, not 40 percent, which is why so much buy-to-let moved into limited company structures.
- Does the shield apply to personal borrowing?
- No. There is no UK relief for interest on personal loans, credit cards, car finance, or a residential mortgage on your own home. For personal debt the after-tax cost equals the nominal rate, and the calculator should be run with a zero tax rate to reflect that.
- Why does the after-tax figure matter for investment appraisal?
- Because it is the debt component of a weighted average cost of capital, which is the discount rate most UK corporate finance uses to appraise projects. Using the pre-tax rate overstates the hurdle a project must clear and causes viable investments to be rejected.
- Is the shield worth anything to a loss-making company?
- Not in the current period. Relief needs taxable profit to relieve. Losses can generally be carried forward against future profits, subject to the loss restriction rules that limit the offset above £5 million, so the benefit is deferred rather than lost — but a loss-making company bears the full pre-tax cost this year.
- How does this change a lease-versus-buy decision?
- Considerably. Operating lease rentals are generally deductible as they are incurred, while purchasing generates relief through interest plus capital allowances, including full expensing on qualifying plant and machinery. Because the timing of relief differs, the comparison has to discount both after-tax cash flow streams rather than compare headline payments.