The Loan charge was implemented in the Finance (no. 2) Act 2017, is a 45 percent charge on all payroll remuneration derived from loans made since 1999.
The 2019 loan charge is an anti-avoidance mechanism designed to compensate the Exchequer for tax losses resulting from a number of “disguised remuneration” schemes. Individuals were compensated in the form of loans, which replaced a portion or all of their salary. Typically, these loans were issued by a third party, such as a “employee benefit trust” financed by the company, and the loans were arranged in such a way that they were unlikely to be repaid.
This was achieved because, unlike salary, loan earnings are not usually considered revenue and hence are not subject to income tax or National Insurance (employee or employer).
Any loans taken out in such conditions since 1999 and still unpaid on 5 April 2019 became taxable as income in one go under the loan charge law, which was authorised by Parliament and which HMRC is charged with enforcing. Many impacted were encouraged to enter into agreements to resolve past tax liabilities by April 5, 2019, on the grounds that the “loans” were taxable as income in the years they were taken out. The loan fee does not apply to anyone who agreed to settlements.
HRMC loan charge
The loan charge is a fee assessed on all unpaid loan balances as of April 5, 2019. Unless an election is made by 30 September 2020 to distribute the loans over three tax years, it will fall into the 2018/19 tax year.
- The interest rate you pay will be determined by the amount of loans you take out and your other income over the year. For example, if you have other income of £50,000 and loans totalling £100,000, your loan’s income tax would likely be £40,000 and employee NIC will likely be $2,000.
- It could be preferable to reach an agreement with HMRC rather than pay the loan bill.
- On December 20, 2019, it was revealed that those with no discretionary assets and an annual income of less than £50,000 would be eligible for Time to Pay arrangements.