The HMRC Loan Charge – contractor guide and 2026 settlement scheme

Contractors who have used disguised remuneration schemes in the past may be subject to the Loan Charge – retrospective taxation on a scale not seen before.

Although the measure took effect in April 2019, it continues to affect tens of thousands of people, and remains one of the most contentious pieces of tax legislation in recent years.

Background to the Loan Charge

In recent years, disguised remuneration (DR) schemes have been marketed to contractors in many industries, with some promising take-home pay of up to 90%.

Typically in the form of an Employee Benefit Trust (EBT), these structures provided payment to their members in the form of tax-free loans (which were never repaid), rather than salaries.

HMRC has challenged disguised remuneration schemes for many years. Marketing claims that an arrangement was legal or approved did not establish that the payments were tax-free.

However, the Finance (No. 2) Act 2017 introduced powerful measures that allowed HMRC to retrospectively tax members of such schemes, originally dating back almost 20 years.

You can read the GOV.UK overview here

Although some individuals used DR schemes purely to avoid paying tax, others were misled by scheme providers and marketers. In many cases, participation was strongly encouraged by recruiters or accountants, with assurances that the arrangements were legal or even “QC approved”.

Disproportionate response by HMRC

The ICAEW has said that HMRC should have acted far earlier against loan-based scheme providers, and regardless of why individuals signed up, the penalties for having done so are too harsh:

Some people using DR schemes knew exactly what they were doing and were deliberately avoiding tax. They deserve little or no sympathy. In fact, HMRC and the former Inland Revenue should have acted far sooner against these schemes. However, not all taxpayers are in this position: many were misled about the arrangements and would not have appreciated what they were doing. In their case, while their position needs to be regularised, we think they should not be so heavily penalised.

The 2019 climbdown

The Loan Charge is a retrospective piece of legislation, first announced in 2016. It initially targeted individuals who used disguised remuneration schemes between 6 April 1999 and 5 April 2019.

Following an independent review in late 2019 by Sir Amyas Morse, the scope was reduced:

• Loans made before December 9th, 2010, are excluded.
• Loans between December 2010 and April 2016 are excluded if the scheme was fully disclosed to HMRC and no action was taken.
• HMRC introduced the option to spread the charge over three tax years, alongside “Time to Pay” arrangements.

Even after these changes, the legislation is estimated to have affected more than 50,000 people.

The human cost

The enormous retrospective tax bills generated by the Loan Charge, plus interest, have left many individuals with unaffordable liabilities and significant stress.

Worryingly, there have been a growing number of reports of contractors in serious distress. The Loan Charge Action Group, a volunteer organisation, has repeatedly raised concerns about the mental health impact, calling for HMRC to take immediate action to prevent financial ruin and mental breakdown.

These victims never set out to avoid tax. They were simply following professional advice, often as a requirement of their contract employment… The ‘vulnerable customer policy’ is not sufficient nor will it prevent mental breakdown or suicides, so they must set up a hotline and deal with the consequences of this policy and their unfair pursuit of people who are at risk. – Richard Horsley, LCAG.

The measure has been linked in Parliament to at least ten suicides, with far more individuals reporting depression, anxiety, or severe financial hardship.

When does the Loan Charge apply?

You may be liable if:

• The loan was arranged on or after 9th December 2010, and all or part of it remained outstanding on 5th April 2019.
• The scheme would otherwise have fallen within the disguised remuneration legislation, even if disguised as a loan transfer.

How the Loan Charge works (the mechanics)

• What counts as a ‘loan’? Payments routed via DR arrangements (typically EBTs or similar) that were claimed to be non-taxable loans, advances, grants or annuities. HMRC treats these as taxable earnings because they were never genuinely intended to be repaid.
• The charge date and aggregation: Any outstanding DR loans on 5 April 2019 are aggregated and treated as employment income for the 2018/19 tax year. That means PAYE Income Tax and NICs can arise on the whole outstanding balance in one hit, subject to credits.
• Interaction with previous tax paid: If you have already paid tax (for example via APNs or earlier settlements), HMRC should credit those amounts against the Loan Charge to avoid double taxation.
• Spreading election: HMRC allowed some taxpayers to spread the income across three tax years to reduce the immediate spike. This could reduce the overall tax payable by limiting exposure to higher marginal rates; the election deadline has passed.
• Repaying the loan to a third party: Paying money back to a third-party lender years later doesn’t undo the charge if HMRC considers the original payments were employment income.
• Employers vs individuals: HMRC settlement terms differ depending on whether you’re the employer, a contractor, or an employee in PAYE terms.
• Time to Pay: HMRC can agree Time to Pay arrangements over a number of years where bills are unaffordable.
• Following the 2025 review: A new settlement scheme is available for eligible outstanding liabilities. Check your HMRC offer and the current scheme guidance rather than relying on the temporary arrangements used during the review.

What are your options if you are caught?

Check whether you qualify for the new Loan Charge settlement scheme and ask your adviser to review the income, loan details and calculations in HMRC’s offer.

If the figures are wrong, contact your caseworker before accepting. If you cannot pay in full, discuss an instalment arrangement before signing the acceptance form.

Repaying a loan now does not remove a Loan Charge liability that arose on 5 April 2019. Obtain advice before paying a scheme provider or third-party lender.

The 2025 review and the new settlement scheme

The government commissioned a review led by Ray McCann in January 2025. Its findings and the government’s response were published at Budget 2025, leading to a new settlement scheme for eligible individuals and employers with unpaid liabilities.

HMRC published its settlement scheme guidance in July 2026 and updated it in October 2026. The scheme uses a calculation based on the years the income was received, allows for promoter fees and includes a further £5,000 deduction. Reductions are capped at £70,000, and the offer excludes late-payment interest, most penalties and qualifying Inheritance Tax liabilities covered by the scheme.

HMRC writes to those it believes are eligible. A signed acceptance is needed even where the offer reduces the amount payable to £0. Payment plans can run for up to five years, or longer where circumstances justify it.

If you have not received an offer, contact your caseworker or use the contact details in the official guidance. Read our report on the settlement announcement for background.

Further Loan Charge reading

For more detailed guidance and commentary on the Loan Charge and disguised remuneration schemes, try these links:

• GOV.UK – Loan Charge overview
• Ross Martin – Loan Charge and disguised remuneration
• Loan Charge Action Group
• Loan Charge APPG
• Chartered Institute of Taxation – Loan Charge explainer
• Computer Weekly – The Loan Charge scandal explained