Payment holiday interest

Definition

During a payment holiday, you pause repayments, but interest almost always continues to accrue and is usually capitalised onto the balance. So the loan grows during the break, and either the term extends or later payments rise. A holiday relieves cash flow but adds to total cost.

In plain terms

A break from paying is not a break from the meter running. You will pay for the holiday later, with interest on the interest.

Why it matters for your company

Take a payment holiday as considered relief, not free time — and ask exactly how the deferred interest is handled. See capital repayment holiday.

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How lenders read it

When a lender considers a payment holiday request, they are typically looking at whether the pause is a sensible response to a temporary dip in trading, or a sign of a deeper cash flow problem. A UK limited company that asks early, with a clear explanation of why the holiday is needed and how normal payments will resume, tends to be viewed differently to a company that requests one only after already missing payments.

Because the interest keeps building in the background, a lender will usually want to understand the shape of the company's cash flow after the holiday ends, not just during it. The concern is less about the pause itself and more about whether the higher balance or extended term that follows is genuinely serviceable once trading normalises.

In practice

Picture a UK limited company whose income has slowed for a defined, temporary reason. Rather than missing a payment outright, the director agrees a payment holiday with the lender: repayments stop for the agreed period, but interest keeps accruing and is added to the balance, as described on this page. The company gets breathing room in its bank account now, in exchange for a larger balance, and either higher payments or a longer term, later.

The practical work for the director is in the follow-up: understanding exactly how the deferred interest has been added to the loan, confirming the revised schedule once payments resume, and checking that the new payment level is realistic against the company's expected trading, not just its current relief. Treating the holiday as a deliberate trade-off, rather than a problem solved, is what keeps it from becoming a second, bigger problem down the line.