Understanding the UK disguised remuneration loan charge
The Loan Charge was introduced by the UK Government in Schedule 11 of the Finance (No. 2) Act 2017 to tackle disguised remuneration tax avoidance schemes. These arrangements typically involved contractors, freelancers, or company directors receiving loans instead of standard salaries to bypass PAYE Income Tax and National Insurance.
Under the statutory charge, any disguised remuneration loans that remained outstanding and unapproved by 5 April 2019 are treated as taxable employment income, subject to standard UK Income Tax rates.
Morse Review recommendations and 3-year spreading
Following an independent review led by Sir Amyas Morse in December 2019, key changes were enacted to make the Loan Charge fairer. Crucially, the review removed loans made before 9 December 2010 (where no open enquiry existed) and granted taxpayers the right to spread their outstanding loan balance equally across three consecutive tax years.
Spreading the balance across three tax years prevents the entire loan sum from bunching into a single tax year, which frequently pushed individuals into the 40% higher rate or 45% additional rate tax bands and triggered the clawback of the personal allowance.
How the loan charge is calculated
The Loan Charge is calculated on a marginal basis on top of your existing taxable earnings. To determine the liability, HMRC calculates the total tax payable on your base income plus the loan charge portion, then subtracts the tax you would have paid on your base income alone.
If you do not elect for spreading, the entire loan is taxed in a single year. If you elect for spreading, one-third of the total loan is added to your income in each of the three tax years, often saving tens of thousands of pounds in higher band tax.
Worked example: 60,000 pound loan with 30,000 pound base income
Consider an individual with regular earnings of 30,000 pounds facing a 60,000 pound loan charge:
1. Single-year lump sum: Total income jumps to 90,000 pounds (30,000 pounds base plus 60,000 pounds loan). This pushes 39,730 pounds into the 40% higher rate band. The marginal tax charge on the loan is 20,446.00 pounds, an effective tax rate of 34.1%.
2. Three-year spreading: One-third (20,000 pounds) is added each year, making total income 50,000 pounds annually. Because 50,000 pounds remains below the 50,270 pound higher rate threshold, the entire loan is taxed at the basic rate of 20%.
3. Three-year tax charge: 4,000.00 pounds per year, totalling 12,000.00 pounds across all three years (effective tax rate of 20.0%).
By electing to spread across three years, the taxpayer saves 8,446.00 pounds in Income Tax.
HMRC time to pay and settlement arrangements
Given the substantial liabilities often generated by the Loan Charge, HMRC offers Time to Pay (TTP) arrangements. Individuals unable to settle their liability immediately can negotiate manageable monthly installment plans based on household income and expenditure, without needing to sell their main home.
Any voluntary restitution payments or disguised remuneration settlement terms previously agreed with HMRC are credited against the final Loan Charge calculation.
Inputs for the loan charge calculator
Outstanding loan charge balance
The total amount of disguised remuneration loans subject to the charge that remain outstanding and unapproved.
Annual other taxable income
Your typical taxable income per year from employment, self-employment, pensions, or investments.
Morse Review spreading election
Choose whether to calculate the charge as an upfront single-year lump sum or spread equally across three tax years.
Prior voluntary restitution paid
Any settlement or voluntary payments already made to HMRC that can be credited against your liability.
Tax year baseline
The tax year rates used for personal allowance and tax band thresholds.
CALCULATOR QUESTIONS
Loan charge calculator questions
What is the UK Loan Charge?
The Loan Charge is an anti-avoidance tax rule introduced in the Finance (No. 2) Act 2017 that taxes outstanding disguised remuneration loans received between 9 December 2010 and 5 April 2019 as employment income.
Can I still spread my loan charge across three years?
The statutory election under the Morse Review allowed taxpayers to elect to spread their outstanding balance equally across three tax years (2018/19, 2019/20, and 2020/21) on their self-assessment returns to avoid tax band bunching.
Does the loan charge apply to loans made before 9 December 2010?
Following the Morse Review recommendations enacted in 2020, loans made before 9 December 2010 are excluded from the Loan Charge, provided the tax avoidance scheme was disclosed to HMRC and no open tax enquiry or assessment existed at the time.
Can I set up a payment plan with HMRC for the loan charge?
Yes. HMRC allows taxpayers facing loan charge liabilities to agree Time to Pay (TTP) arrangements, spreading payments over several years depending on their financial circumstances, with no statutory cap on the repayment period for lower-income households.
Are commercial employer loans subject to the loan charge?
No. Legitimate commercial loans, employee salary advances, season ticket loans, and director's loans are governed by standard Benefit in Kind and Section 455 rules, not the disguised remuneration loan charge.
Does the loan charge include National Insurance contributions?
While the statutory loan charge itself was enacted as an Income Tax charge under PAYE, earlier disguised remuneration settlements and APNs often involved negotiations over Class 1 employee and employer NICs.