Tax Glossary

Loan Charge

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Last updated on:
March 17, 2024

The Loan Charge represents a significant tax measure targeting individuals who received compensation in the guise of loans, rather than direct income, effectively circumventing the usual tax contributions. Initially applied to arrangements dating as far back as 1999, the charge was introduced to recoup taxes on Disguised Remuneration schemes up to April 5, 2019. These schemes were not technically illegal at the time, leading some to be inadvertently involved through advice from professionals.

Key Aspects of the Loan Charge

  • Tax Rate: The loan charge imposes a 45% tax rate on all relevant loans that were not intended to be repaid, aiming to recover evaded Income Tax and National Insurance.
  • Legislation Adjustments: Responding to criticism, the Finance Act 2020 refined the loan charge's scope. It now applies only to loan arrangements made after December 9, 2010. Moreover, individuals are exempt from the charge if they had disclosed their loan scheme on a tax return and HMRC did not take action. Additionally, the tax liability can be spread over three tax years to alleviate financial strain.

Who is Affected?

The responsibility for the loan charge falls on the employer if they facilitated the scheme. Should the employer be unable to pay (e.g., if they are no longer operating or based offshore), the liability shifts to the individual.

Your Options:

  • Loan Repayment: Clearing the loan in full removes the liability for the loan charge.
  • Settlement with HMRC: Proactively engaging with HMRC to settle tax liabilities outside of the loan charge can be a preferable route for many.
  • Facing the Loan Charge: For those unable to repay the loan or settle, the loan charge remains a compulsory tax payment.

HMRC offers support and payment plans for individuals earning under £50,270 or those facing hardship, ensuring that the financial impact of the loan charge can be managed more feasibly.

Navigating the Charge:

If you're impacted by the loan charge, it's crucial to assess your situation and consider your options carefully. Whether through repayment, negotiation with HMRC, or another strategy, there are pathways to mitigate the financial implications of this charge.

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