Loan charge victims edge closer to relief

Almost a third of people caught up in the UK’s ‘loan charge’ could have their debts wiped, as the government moves to settle the tax scandal.

Linked to severe financial distress and at least ten suicides, the loan charge left thousands waiting for answers, and, many hope, long-overdue fairness.

In a report published alongside last week’s budget, the government said it would go further than the recommendations in an independent report. As a result, most people will see their bills cut in half, costing the public purse £365m over the next five years.

What was the loan charge?

For years, tens of thousands of workers, many without realising it, were drawn into tax-avoidance schemes promoted as simple and compliant ways to receive their pay.

Here’s how it worked:

• Contractors and agency workers were encouraged not to set up limited companies.
• Instead, they were paid through umbrella companies or similar schemes that handled their ‘payroll’.
• Rather than receiving wages, they received loans that were never meant to be repaid.
• These loans weren’t taxed like income, making the scheme appear appealing.

Many workers believed the deductions on their payslips were tax. In reality, they were fees paid to scheme promoters, often with accountants receiving commissions for referrals.

When HMRC later ruled these arrangements illegitimate, the workers, not the umbrella companies, accountants or promoters, were hit with huge tax bills, sometimes running into hundreds of thousands of pounds.

Those affected included:

• contractors who trusted the schemes to manage their tax
• agency workers such as cleaners and care staff, often given no choice but to be paid by a particular umbrella company
• people completely unaware they were in a tax-avoidance arrangement

The consequences have been devastating, pushing people to the brink of bankruptcy, devastating families and being linked to ten suicides.

How did it become a crisis?

In 2016, then-chancellor George Osborne announced new legislation to recover the ‘missing’ tax, but from individuals rather than the companies behind the schemes.

Although tax avoidance isn’t illegal, HMRC successfully challenged these schemes in court and pursued workers for backdated tax. The roles of those who promoted, marketed and profited from the schemes were not examined.

A 2019 review attempted to bring clarity, but it was criticised for involving HMRC and treasury officials, who were central to designing the loan charge in the first place.

It was also criticised for not investigating the historical roles of promoters, recruitment agencies, accountants or umbrella companies, even though they propped up the schemes.

As a result:

• MPs and campaigners called for a broader review into mis-selling.
• There were demands that promoters and agencies, not just workers, share the tax burden.
• Campaigners argued that victims were misled and should not be punished for trusting ‘professional’ advice.

What’s happening now?

Estimates vary, but around 70,000 people are thought to have been affected by the loan charge, with around 25,000 having already settled.

Before the 2024 general election, Labour promised a full, independent review. In the autumn budget 2024, the government confirmed that a second independent review would go ahead, following testimonies about the human impact of the policy.

HMRC is finalising the impact of the settlement opportunity for affected taxpayers, the Treasury confirmed last week. Letters are expected to begin going out from January 2026 onwards.