Update on the new loan charge settlement opportunity 

The new settlement terms follow an independent review into the loan charge, led by Ray McCann, commissioned in response to ongoing concerns about its fairness and impact. 

As part of the November 2025 Budget, the government accepted almost all of the review’s recommendations. A key outcome is a new settlement opportunity for taxpayers affected by the loan charge. 

Basics 

We have updated our loan charge page to explain the basics of the new settlement opportunity. Key points include: 

• Many eligible taxpayers will be able to settle their loan charge liabilities on more favourable terms. We include a case study below looking in more detail at the rules and how they might apply. 
• Taxpayers will most likely need to enter a contract settlement with HMRC to access the new terms. We set out more about what this is below. 
• Eligible taxpayers include those with arrangements within (or partly within) the loan charge and those who have previously settled (although not under November 2017 terms) but still have amounts outstanding. If taxpayers have arrangements partly within the loan charge rules, they will need to settle all their disguised remuneration affairs to be able to access the new terms. 
• Not everyone will benefit. In particular those who have already fully settled and fully paid will not be included and individuals outside the relevant loan charge time period will also be excluded. Concerns have been raised, including by LITRG, that this could lead to unfair outcomes and we will continue to raise this point. 

Case study  - John 

John was in a loan scheme during the tax years 2012/13 to 2017/18.  All the arrangements are fully in scope of the loan charge. In all years, he received: 

• a salary that was processed through the payroll based on a minimum amount (approx. £8,000) and 
• a second payment into his bank account, which was the untaxed loan amount of £20,000. 

John then retired and in 2018/19, he only had state pension income of £8,500. 

Under the loan charge (as originally set out), the £120,000 of untaxed loans (£20,000 in each of six tax years) will be treated as income in 2018/19. As John’s total income in 2018/19 is £128,500, he is not entitled to any tax-free personal allowance. Because of his state pension income of £8,500 income, John only has some of his basic rate band available (£26,000) to use against the extra loan charge income. This would mean the remaining £94,000 of it will be taxed at 40%. This results in: 

• a total tax amount on his loan charge income of £42,800 (£5,200 and £37,600 is £42,800) 
• a total 2018/19 liability (including pension income) of £44,500. 

John did not file his 2018/19 tax return, nor pay the liability. As such, to date, he has accrued interest and penalties roughly as follows: 

Per the recent technical note, to calculate the new settlement amount, HMRC will: 

1. work with customers to determine their total value of loans or quasi-loans which are subject to the loan charge legislation 

John’s un-taxed loan income each year was £20,000. So over six years, this is £120,000. 

2. work with customers to determine other amounts paid to them under the arrangements which those loans or quasi-loans were made. For example, scheme income which was taxed at the time the income was received 

He also received a separate salary of £8,000 per year through payroll. John has no payslips, but HMRC are able to confirm the salary amount from their data. We assume this salary did not give rise to any PAYE deductions under a standard tax code.  

3. determine the amounts charged to customers (as deductions, fees, or otherwise) under those arrangements. This will typically be fees paid to promoters 

Promoter fees are unknown. For the purposes of this article we therefore have assumed a 20% fee rate (based on comments in the original Report), meaning loans are grossed up to £25,000 (i.e. £20,000 × 100/80), implying deemed fees of £5,000 per year. HMRC are yet to say how the fee rate will be determined in practice. 

Accordingly, John’s assumed gross scheme income for the next few steps is £33,000 per year (£8,000 salary + £25,000 grossed-up loan amount). 

4. attribute the amounts determined in the above paragraphs to relevant tax years. Further detail on this attribution will be provided in secondary legislation 
5. this will determine a customer’s gross scheme income in each tax year, as referenced in the government’s response, for the purpose of calculating the deduction for historic promoter fees 
6. calculate the additional income tax and national insurance contributions (NICs) which would have been payable by the customer in each tax year. For the avoidance of doubt, additional income tax and NICs will only be calculated on (1) and (3) above and not amounts that have already been subject to tax (2) 

*Note: Under the Finance Act, HMRC are required to include in the calculation of the settlement amount ‘the additional income tax and national insurance contributions (NICs) which would have been payable by P as regards the tax year’. The inclusion of NIC presumably reflects the Review’s focus on reconstructing the position year-by-year, then reducing the burden overall, For the purposes of this illustration, we have included a notional amount of NIC. We recognise that this does not reflect the detailed operation of NIC. Rather, it is intended as a simplifying assumption to demonstrate how the calculation might work, given the complexity of NIC and the possibility that HMRC may adopt a pragmatic approach. The precise methodology will depend on the forthcoming regulations.

7. reduce the additional tax and NICs that would be payable in each relevant tax year, for the deduction for historic promoter fees. This is calculated in each year as 10% of a customer’s gross scheme income up to £50,000 and 5% on the next £100,000. This deduction cannot reduce the amount of additional tax and NICs in any tax year below nil 

John can take a deduction of 10% of the gross scheme income each year: 10% × £33,000 = £3,300 per year.  

8. add together the remaining amounts (from 7) for each tax year and deduct £5,000 from the total. This is the deduction in line with the government’s decision to write off a further £5,000 of each customer’s liability, in addition to the review recommendations. This deduction cannot reduce the remaining balance below nil 

The table now becomes:  

The new opportunity gives a £5,000 further reduction: £21,406 - £5,000 is £16,406.  

9. where the £70,000 cap doesn’t apply, (8) is the settlement amount under the new settlement opportunity. The amount actually payable may be less where the customer has already made payments relating to their original liability, as these will be credited against the final balance to pay (but will not create a repayment) 
10. the new settlement amount will not include any late payment interest, inheritance tax that has already arisen or penalties as standard

In order to calculate whether the £70,000 cap applies, we need to work out the original loan charge liability. Under normal processes, there are often multiple, complex issues and calculations required to establish this amount. However the Finance Act provides the authority for regulations to include details of how the calculation will operate. This should give some flexibility, so we anticipate that a simplified calculation of the original liability may be used. To do otherwise would possibly mean including a wide range of elements within the original liability, thus increasing the starting figure and making it progressively more likely that the difference between the original and new liability will exceed £70,000. 

We await further details on this, however we will be asking HMRC to carefully consider elements including: 

• penalties and IHT liabilities - they have already confirmed that these will not be included in calculation of the original loan charge liability.  
• interest – late payment interest will be included in the original liability however we think HMRC should calculate it from 1 February 2020 (for late 2018/19 tax payments) to a defined fixed point, so that it does not continue to build up while cases are waiting to be progressed. 
• underlying liabilities – HMRC should only include liabilities arising for the 2018/19 loan charge and not in relation to any balance that might remain for the underlying tax years where there is an open assessment or enquiry. 
• spread elections – we think HMRC should honour any spread elections. We will seek to discuss whether late elections are still being considered. 
• other ‘inflating’ elements – for example we think HMRC should not include any s222 amounts that may have been included in assessments 
• we anticipate that calculations will consider any loss of personal allowance and payment of HICBC where income exceeds the relevant thresholds for this to happen and any other income in 2018/19 (including one off events like a pension lump sum) for the purpose of determining the tax rates applicable.  

Taking all of the above into account, we surmise the following position for John: 

• Original 2018/19 liability: £71,325 
• Simplified loan charge position for determining if cap applies £42,800 plus late payment interest of, say £14,000 is, £56,800.  
• New loan charge position: £16,406 
• Discount is £40,394 meaning £70,000 cap doesn’t apply 

John’s final settlement amount is therefore £16,406.  

New settlement process – administrative matters 

We understand that taxpayers will need to enter a contract settlement with HMRC to benefit from the new terms. This is a legally binding agreement that will include a final settlement figure and any payment terms (see below) and provides certainty and closure. (However, if you have IHT complexities and some or all of your loans are not being written off, you may still need to pay more tax in the future.)  

As part of the contract settlement process, if there are questions of hardship, you can ask HMRC to consider accepting a sub-standard offer. If you just need more time to pay what you owe, you should be able to arrange an instalment option as part of a contract settlement.  

Note, there will be ‘forward interest’ for any payment arrangements. As things stand under current methodology, interest will be calculated on the reducing balance at a flat rate, which shields you from interest rate fluctuations, but will include a 1% surcharge. 

Some people can find the traditional contract settlement process bureaucratic and intimidating and it can be particularly hard to navigate if you are unrepresented. Ideally we would like to see the introduction of some kind of ‘simplified settlement’ process for certain groups of taxpayers, including those where there will clearly be nothing to pay under the new terms. In the meantime, all taxpayers will have a named HMRC caseworker to contact with questions or queries, which should help make the process easier to manage. 

What should affected individuals do now? 

HMRC is currently writing to affected individuals to explain their position - based on HMRC’s information - and next steps.  

Following this initial letter, HMRC will then contact taxpayers again, with tailored settlement proposals and an offer to enter a contract settlement. We understand that HMRC will prioritise certain groups within this exercise. 

Taxpayers who know now that they wish to settle, are encouraged to contact HMRC proactively as this may speed up the process. There is no risk in expressing interest – nothing becomes binding until a written settlement contract is signed.

If you think you should have been contacted with an initial letter but have not been, or you have been contacted but with the wrong type of letter, you should: 

• contact your HMRC caseworker (if you have one), or 
• call HMRC’s helpline on 0300 322 9494