UK loan charge reforms risk ‘inequitable outcomes’ for employers

The loan charge (LC) was originally introduced as part of broader efforts to tackle historical tax avoidance schemes in the UK that sought to disguise remuneration as a non-taxable payment, typically in the form of a loan.

The tax policy has been subject to considerable criticism since it came into force in 2019 due to its retroactive nature and its potentially adverse impact on taxpayers.

Later that year, a government-commissioned review into loan charges made some changes. However, in November 2024, the government announced there would be a second review given the potential number of individuals and employers still left with outstanding LC tax liabilities.

The Loan Charge Review

In January 2025 the government commissioned an independent review of the loan charge (LCR) to assess its impact on employers and employees and provide recommendations to help bring closure for those still with outstanding loans.

On 26 November 2025, HM Revenue and Customs (HMRC) published a policy paper which details the government’s response to the LCR.

The LCR sets out a number of new provisions and guidance for both individuals and employers that have been assessed as liable to the loan charge but have not yet resolved their position with HMRC. 

Recommendations and policy changes

The LCR put forward nine recommendations. The government accepted all but one of the LCR’s nine recommendations and, in some respects, has gone further.

Firstly, the LCR proposes a new settlement opportunity (SO) whereby new, secondary legislation will establish an opportunity for all parties with outstanding LC liabilities, including employers, to settle these obligations with HMRC. 

Reduced settlements will be available in accordance with a new recalculation. The balance of any current assessments would be written off at the time of settlement, not merely suspended. Where liabilities are settled with employers, HMRC will not disallow any corporation tax deduction for amounts settled. 

The review also recommended allowing more straightforward payment plans, including up to five years by default and up to 10 years with HMRC approval. The government has said that where a taxpayer is unable to pay the new amount in full immediately, HMRC will agree a payment arrangement tailored to their ability to pay. Forward interest will apply as normal if a person decides to pay via instalments. Anyone will be eligible to pay the new liability over five years, without having to discuss affordability with HMRC.

However, the government declined to impose a maximum 10-year time limit to pay the liability, which was proposed in the LCR.

If a taxpayer seeks to settle the tax liability, HMRC will recalculate it. However, the SO provides that “the maximum amount that can be written off on what someone owes because of the loan charge” will be £70,000.

From the documentation currently published it appears that this cap will include the write-off of interest, but not penalties. In other words, £70,000 is a cap on the loan charge assessment and interest that can be settled, but the withdrawal of penalties is not taken into account in determining the £70,000 cap.

What employers need to know

The LCR estimates there are still around 32,000 individuals for whom loan charge assessments remain unresolved. It adds that “HMRC has only been able to agree contract settlements including the LC with around 800 individuals since the Loan Charge arose in 2019”. HMRC estimates that LC compliance costs the tax authority around £31 million per year, which only serves to highlight the scale of the problem.

The LCR has potentially significant implications for employers for whom loan charge assessment amounts are typically higher, covering multiple employees.

The LCR refers to treating individuals and employers in the same way, but it is not explicit as to how the £70,000 cap will apply to an employer who is dealing with assessments related to more than one individual.

Although HMRC has indicated that this will be specifically addressed in secondary legislation, if a single cap is applied per employer rather than per employee affected, there are concerns that this could also result in inequitable outcomes.

The impact of ‘without prejudice’ payments made prior to the implementation of the LCR is also not yet clear. HMRC has stated that the settlement opportunity is only available for those who have outstanding loan charge assessments but has not made it clear whether this applies to those who have paid the assessment on account purely in order to stop interest running, or is designed only to prevent the re-opening of previously settled loan charge cases.

The write-off of penalties – particularly if the £70,000 limitation is applied per employee rather than per employer – may make the incentive to settle substantially higher.

Next steps for businesses

On 9 February 2026, HMRC published two accompanying documents to the LCR:

• a technical note; and  

• a policy paper outlining HMRC’s operational activity. 

The technical note explicitly states that further details of how the SO will apply to employers will be set out in secondary legislation in due course.

HMRC’s operational briefing states that it planned to contact taxpayers in January 2026. Given the lack of guidance to date for employers, it is expected that direct communications to those affected would only come after such guidance has been issued.

When HMRC sets out the terms for employers and makes the opportunity available, they will likely do so with a limited window for taxpayers to make a decision. Those affected are urged to prepare and give consideration to the SO as early as possible.

Co-written by Sukhbir Binning of Pinsent Masons