Glossary · UK
What is Loan Charge?
A one-off tax charge on outstanding loans made through disguised remuneration schemes, such as employee benefit trusts, that were never repaid and were used in place of taxed salary.
Full Definition
The Loan Charge is a tax charge introduced to counter disguised remuneration schemes, under which a person's employer (or an intermediary such as an umbrella company) paid them via a "loan" -- often routed through an employee benefit trust or offshore trust -- instead of paying salary that would have been subject to Income Tax and National Insurance. Because these loans were structured to be technically repayable, and in practice were rarely if ever called in or repaid, HMRC treats outstanding balances from such arrangements as disguised income rather than genuine loans. The Loan Charge taxes the total outstanding loan balance as income in the year the charge arises, which for many long-running schemes could add up to a very large single tax bill. The Loan Charge, legislated in 2017 and originally applying to loans going back to 1999, proved highly controversial: an independent review (the Morse Review, 2019) led to it being restricted to loans made from 9 December 2010 onwards, and to schemes that were not properly disclosed to HMRC at the time, while also giving affected taxpayers longer to spread the resulting tax liability over three tax years. Contractors, particularly those who worked through umbrella companies or personal service companies and were advised into these schemes, made up a large proportion of those affected. HMRC continues to offer voluntary settlement terms as an alternative to the Loan Charge itself, and can also pursue Accelerated Payment Notices in relation to the same underlying arrangements.