When do the loan charge and disguised remuneration rules apply?

A summary to determine if the disguised remuneration rules and loan charge apply, how they apply, and what action needs to be taken.

What's new?

In September 2019 the Chancellor commissioned an independent review of the loan charge which was reported upon on 20 December 2019. This announced several changes which are expected to be legislated for in 2020. See Disguised remuneration loan charge (subscriber guide) for full details.

What is the loan charge?

  • Disguised remuneration loans taken out since 9 December 2010 (previously 1999) which are not repaid or settled by 5 April 2019 will be subject to a Loan charge on 5 April 2019.
    •  Unless they were taken out before 6 April 2016, were reasonably disclosed to HMRC and HMRC have not taken any action such as opening an enquiry or raising an assessment or determination.
  • Up until 1 January 2019 was possible to postpone the loan charge in certain restricted circumstances. See How to apply to postpone your loan charge.

What is a disguised remuneration loan?

  • Broadly, if you worked for someone as a paid director, employee or on a self employed basis and you agreed with them to receive a loan instead of any salary or wages, and the understanding was to be that you would never have to repay that loan, such a loan is described a disguised remuneration loan.
  • The aim of paying someone via a disguised remuneration loan is that you avoid tax and the employer avoids NICs.
  • If you are self employed it means that you might avoid income tax and Class 4 NICs.
  • Key features (and selling points) of disguised remuneration loans were that they would be written off 'tax-free' on death, meaning that no tax would ever be paid on your earnings. Alternatively, if you moved abroad the loan could be 'disappeared' with you and the offshore trust making the loan might also disappear.
  • Tax schemes or 'tax strategies' including disguised remuneration loan schemes have been mass-marketed over the last 20 years. The government has now introduced legislation designed to tackle scheme promoters and has also introduced a General Anti-Abuse Rule (GAAR).
  • Many of the providers, promoters and originators of these schemes have now (not unsurprisingly) disappeared or folded.
  • Many firms of accountants and advisers declined to sell these schemes. There is a fundamental difference of opinion between professional advisers as to whether it was ever ethical or morally right to advise people to avoid tax by converting earnings into non-repayable loans. 
  • In some industries low paid employees were paid via loans via umbrella and similar companies and some these employees appear to be genuine victims and unintentional tax avoiders.

Why did HMRC not act sooner?

  • HMRC and parliament seem to have been extremely slow in noticing the rise of a massive tax avoidance industry in the UK.
  • We observe that many people do not understand trusts and most loan schemes used offshore trusts. 
  • HMRC has been litigatating against the many different forms of disguised remuneration scheme since the 1990s: their view was that they did not work however litigation takes time.
  • The most high profile disguised remuneration court case in recent years involved the former Rangers football club. Players received loans instread of pay. The Supreme Court confirmed that the loans were disguised remuneration and subject to PAYE and NICs.
  • HMRC consequently offered loan settlement opportunities. Most people who used loan schemes realised that receiving pay via a loan is a form of tax avoidance not intended by govenment and have consequently settled their loans with HMRC.
  • According to HMRC some 50,000 people are either refusing to settle, or are burying their heads in the sand or are pleading poverty.

How much will the loan charge be?

  • The loan charge is a charge on the amount of all outstanding loan balances on 5 April 2019: it will fall into the 2018/19 tax year unless an election is made to spread the loans over 3 tax years by 30 September 2020.
  • The rate of charge will depend on the amount of loans taken and your other income in the year. For example if you have other income of £50,000 and loans of £100,000 the income tax on your loan is likely to be £40,000 and employee NIC £2,000.
  • It may be better to settle with HMRC than pay the loan charge.
  • On 20 December 2019 it was announced that time to pay arrangements could be agreed for those with no disposable assets and income below £50,000.

In more technical detail:

What are the Disguised Remuneration rules and when do they apply?

The employment income through third parties rules, also referred to as the 'Disguised remuneration' rules, are wide ranging anti-avoidance rules in Part 7A ITEPA 2003 which:

  • Provide for an accelerated employment tax and National Insurance (NIC) charge on a range of remuneration arrangements.
  • Were introduced to ensure that tax on employment income is not avoided or deferred through the use of trusts or sub-trusts or other intermediaries, e.g. Employee Benefit Trusts (EBTs), remuneration trusts, contractor loan schemes and Employer Financed Retirement Benefit Schemes (EFRBS).

What is disguised remuneration?

Disguised remuneration is defined by part 7A as where:


  • A person "A" is a living employee, either former, existing or prospective, of another person "B".
  • There is an "arrangement" to which A (or any person linked to A) is a party to, or which otherwise covers / relates to A.
  • The arrangement is wholly or partly a means of providing the provision of rewards or recognition or loans in connection with A's employment.
  • A "relevant step" in pursuance of the arrangement is taken by a relevant person.

Self-employed and partners (from April 2017):

  • A person (T) is or has been carrying on a trade as a sole trader or partner.
  • There is an arrangement connected with that trade which is wholly or partly a means of providing ‘relevant benefits’ to T, someone connected to T or any other person where T will have the enjoyment.
  • The relevant benefit is connected directly or indirectly with a ‘qualifying third party payment’.
  • A tax advantage will be obtained by T (or a connected party) as a result.

See Disguised remuneration (subscriber) guide 

What is an Accelerated Payment notice?

  • The APN asks you to pay the amount of tax that is in dispute and HMRC then hold the money until the matter is resolved. It is therefore a payment on account.

How can I settle disguised remuneration, EBT or contractor loans with HMRC?

There is currently a Disguised remuneration settlement opportunity "(the November 2017 settlement terms") which remains open to all users of such schemes who registered before April 2019.

  • Settlement registration must have been completed and information provided to HMRC in respect of all loans by 5 April 2019, with the settlement completed by the date specified in your letter from HMRC (previously 31 August 2019), if the loan charge is to be avoided. HMRC have advised that anyone who did not register by this date will not be eligible for the November 2017 settlement terms and must pay the loan charge.

 What are the disguised remuneration settlement terms?

  • Income tax and class 1 primary national insurance (employees) or class 2 and 4 NICs (self-employed and partners) on the amount of the loans, at your marginal tax rate for the year(s) in which the loans were taken out.
  • Interest on the above
  • See FAQs for Disguised remuneration settlements

Where to obtain human support

If you need assistance in dealing with HMRC enquiries, calculating your loan charge or negotiating a settlement with HMRC, contact the Virtual Tax Partner support team. 

Comments (1)

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Thanks for this informative article. Once one has settled with HMRC, what becomes of the horrid loan scheme. Can they come back and ask you to pay the loan back, again, over paying to HMRC and the loan sharks? Surely that can’t be lawful, it...

Thanks for this informative article. Once one has settled with HMRC, what becomes of the horrid loan scheme. Can they come back and ask you to pay the loan back, again, over paying to HMRC and the loan sharks? Surely that can’t be lawful, it would be like working for free...

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