A UK company paying yearly interest, or a royalty for intellectual property owned by someone abroad, must normally deduct income tax at 20% (the basic rate for 2026 to 2027), report it on form CT61 and pay it to HMRC within 14 days of the end of the quarter. A double tax treaty can reduce the deduction or remove it, but for interest the payer must keep deducting until HMRC issues a direction to pay at the treaty rate. For royalties the payer may apply the treaty rate itself if it reasonably believes the recipient qualifies.

Which interest payments carry withholding tax?

Section 874 of the Income Tax Act 2007 applies to payments of yearly interest arising in the United Kingdom made by a company, a local authority or a partnership that has a company as a member, and to payments by anyone to a person whose usual place of abode is outside the UK. The payer must deduct tax at the savings basic rate in force for the tax year of payment. HMRC’s CT61 guidance describes the rate as currently 20%.

Three tests decide whether the duty bites:

  • Is the interest yearly? Short interest is outside section 874. HMRC says at SAIM9076 that this is a question of fact and the intention of the parties is the most important factor. A loan intended to last less than 12 months normally produces short interest, but if a short loan is rolled over HMRC wants clear evidence that a short term was the original intention.
  • Does it arise in the UK? Source depends on all the facts. SAIM9090 lists the factors HMRC regards as most important: where the debtor is resident and its assets are, where the contract is performed and payment made from, the governing law and jurisdiction, and where any guarantor and security are.
  • Does an exception apply? See below.

Which royalties carry withholding tax?

Two provisions matter for most businesses. Section 903 requires deduction at the basic rate from royalties for the use of a patent that arise in the UK. Section 906 requires deduction at the basic rate from royalties, or any other payment, for the use of or right to use intellectual property where the owner’s usual place of abode is outside the UK. Section 906 does not apply to payments for copies of works or articles exported from the UK for distribution outside the UK. Payments for software, brands, designs and copyright licences paid to an overseas owner are the common cases.

When is no deduction needed?

Under section 930 a company does not have to deduct if, when it pays, it reasonably believes the payment is an “excepted payment”. The main categories are:

  • the person beneficially entitled to the income is a UK resident company (section 933);
  • the recipient is a non UK resident company trading in the UK through a permanent establishment and must bring the payment into its UK chargeable profits (section 934);
  • the recipient is on the gross payment list in section 936, which includes charities, local authorities and the scheme administrators of registered pension schemes.

Interest on a quoted Eurobond is also outside the duty (section 882). The test is the payer’s reasonable belief at the time it pays, so the reasons for that belief should be recorded.

The EU Interest and Royalties Directive no longer helps. HMRC confirms at INTM400010 that the UK legislation implementing it does not apply to payments made on or after 1 June 2021, so withholding on payments to EU companies now depends solely on the relevant treaty.

How is the tax reported and paid?

A UK resident company reports tax deducted from interest and royalties on form CT61. Under section 947 the return periods are the quarters ending on 31 March, 30 June, 30 September and 31 December, with the company’s accounting period end creating an extra break where it falls mid quarter. Section 949 requires a return within 14 days after the end of each return period in which a relevant payment was made, and section 951 makes the tax due on the same date without any assessment. HMRC says form CT61 cannot be downloaded; it has to be requested online. A limited liability partnership writes to HMRC instead.

If the recipient asks in writing, the payer must give a certificate showing the gross payment, the tax deducted and the net amount paid (section 975, summarised at SAIM9117). The recipient needs this to claim credit or a repayment.

How does treaty clearance work for interest?

Most UK treaties reduce or remove UK tax on interest, but HMRC is clear at SAIM9210 that relief is not automatic and that no payer is entitled to assume the treaty applies until clearance is given. If interest is paid gross without clearance, HMRC can assess the payer for the tax, interest and in some cases penalties. There are two routes.

Certified claim on a DT form

The overseas lender completes the relevant DT treaty form, gets its tax authority to certify that it is resident there, and sends it to HMRC’s Double Taxation Treaty team. If HMRC agrees, it authorises the UK payer to pay either gross or at the reduced treaty rate. Tax already deducted from earlier payments can be reclaimed on the same form. See how double tax treaties work for how residence and the interest article operate.

The Double Taxation Treaty Passport scheme

Overseas lenders resident in a treaty country can apply on form DTTP1 for a treaty passport. HMRC gives a passport number and publishes holders on a register. The UK borrower then notifies HMRC of the loan on form DTTP2 as soon as possible after the loan is entered into. Until the borrower receives a direction letter it must keep withholding, except in the limited cases HMRC’s scheme guidance allows. A passport normally lasts five calendar years, and HMRC does not send renewal reminders.

Can royalties be paid at the treaty rate straight away?

Yes. Section 911 lets a company that must deduct tax from a royalty calculate the deduction at the treaty rate if it reasonably believes, at the time of payment, that the payee is entitled to treaty relief. HMRC’s guidance on double taxation relief for companies says the payer must include details of these payments in its Company Tax Return. If the payee was not in fact entitled, section 911(3) treats the reduced rate as never having applied, and the payer owes the shortfall.

How does it work in a simple case?

Illustration only. UK Co borrows £1,000,000 for five years from its parent in Country P and pays £50,000 interest a year. It also pays £100,000 a year to an unconnected company in Country R for a software licence. The treaty rate for interest from the UK to Country P is nil and for royalties to Country R is 10%.

Payment Before clearance With treaty relief
Interest £50,000 Deduct £10,000 (20%), pay £40,000, report on CT61 Nil once HMRC issues a direction after a DT claim or DTTP2
Royalty £100,000 No HMRC clearance needed if UK Co reasonably believes treaty relief applies Deduct £10,000 (10%) under section 911 and report on CT61

Interest paid gross on the shareholder loan before the direction arrives leaves UK Co owing the £10,000 per payment. The interest itself must also be priced at arm’s length, and the treaty’s special relationship clause can deny relief on any excess; see transfer pricing for smaller businesses and the corporate interest restriction.

What mistakes come up most often?

  • Paying a foreign parent’s loan interest gross because “the treaty rate is nil”, without a direction from HMRC.
  • Treating rolled over short term loans as producing short interest without evidence of the original intention.
  • Missing the 14 day CT61 deadline for each quarter in which interest or royalties were paid.
  • Applying section 911 to interest. The reasonable belief route is for royalties only.
  • Assuming the EU directive still removes UK tax on payments to EU group companies.
  • Withholding on interest paid to a UK resident company, which is not required.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.