The HMRC Loan Charge – a guide for contractors (updated 2025)

loan charge 2019

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

Until recently, DR schemes were not targeted by the tax authorities, as they may not have been operating outside the tax rules at the time.

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 doesn’t reduce the overall liability, but can ease cash-flow and limit exposure to higher marginal rates.
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.
While the 2025 review is running: HMRC says certain enforcement that might prejudice the review is paused, but it is still contacting affected taxpayers and progressing cases outside the review scope.

What are your options if you are caught?

Explore a settlement opportunity with HMRC – often the only practical way forward for most people.
Repay the loan in cash (if the original provider allows it) – this would remove the tax liability, though few can afford to do so.
Pay the Loan Charge – often resulting in huge PAYE and NIC liabilities built up over many years.
Challenge HMRC’s position – possible but rarely successful without significant resources.

The 2025 “review”

In January 2025, the government announced a “new independent review” into the Loan Charge, led by Ray McCann, former President of the Chartered Institute of Taxation. Despite the label, commentators have described the review as a “sham” and a “farce” because it will not:

Examine whether the Loan Charge is fair.
Review HMRC’s past enforcement.
Extend the charge to scheme promoters.

The stated aim is to identify and remove barriers that prevent those caught from reaching a resolution with HMRC. The review’s call for evidence closed in May 2025. The final report is expected in the summer, with the government likely to respond in the Autumn Budget.

Further Loan Charge reading

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