Frequently Asked Questions

To be considered an authorised loan to a sponsoring employer under HMRC regulations, the loan must meet the following five tests:
a) Security: The loan must be secured as a first charge against an asset of equal or greater value.
b) Interest rates: Interest must be charged at a commercial rate, typically at least 1% above the average base rate of six leading high-street banks.
c) Term of loan: The loan must not exceed a term of 5 years (though it may be rolled over once under specific conditions).
d) Maximum amount of loan: Total lending to sponsoring employers must not exceed 50% of the SSAS’s net assets.
e) Repayment terms: The loan must be repaid in equal instalments of capital and interest throughout the term.
Failing to meet any of these tests can result in the loan being treated as an unauthorised payment, which could lead to tax charges.

If a SSAS loan fails one or more of the five key tests, it will be treated as an unauthorised payment. While a SSAS will not be charged again for multiple breaches, the unauthorised payment will be based whichever failed test caused the largest breach. The total unauthorised payment cannot exceed the original loan amount.

The SSAS loan must be secured, and the value of the security must be at least equal to the amount of the loan (including interest). Additionally, the loan must have a first charge on the proposed security, meaning it takes priority over any other claims on the asset.
While the form the security can take is fairly open, there are certain assets, such as residential property, that can incur tax liabilities if used, particularly if the loan defaults. Typically, commercial premises are the preferred form of security.

If a SSAS loan ceases to be secured at any point after it is made, an unauthorised payment is deemed to have occurred. The amount of the unauthorised payment is equivalent to the loan still outstanding, including any accrued interest, and a tax charge would be due based on this outstanding amount.

So long as the replacement security is of at least equal value to the outstanding amount of the loan (including interest), then this isn’t a problem.
However, if the value of the security falls below the outstanding loan amount, an unauthorised payment occurs. The unauthorised payment is the difference between the value of the security and the amount owed (including interest).
For instance, if the initial security was worth £300,000 and is replaced with security worth £200,000, but the loan outstanding (including interest) is £230,000, an unauthorised payment of £30,000 would be deemed to have occurred. This could lead to tax charges on both the pension scheme and the sponsoring employer.

If the sponsoring employer (or connected party) undertakes some deliberate action that would lower the value of the security, then there is a potential tax charge. If the value of the security drops naturally (ie, a property is revalued and, due to general market trends, the commercial value drops), then this isn’t an automatic breach (Schedule 30 of Finance Act 2004); however, it would still likely be incumbent upon the trustees to arrange further security to make up the shortfall as part of their overall duty of care to the scheme.

An unauthorised payment triggers significant tax penalties. Typically, the sponsoring employer will be liable for an unauthorised payment charge in respect of loans made to them, which is 40% of the unauthorised payment. For example, if an unauthorised payment of £30,000 occurs, the sponsoring employer will be charged £12,000 (40% of £30,000).
Additionally, the scheme administrator may be liable to a scheme sanction charge for failing to maintain compliance with the loan security requirements.

The interest rate charged on a SSAS loan to a sponsoring employer must be at least 1% above the average base lending rates of six specified high street banks:
• Bank of Scotland
• Barclays Bank
• HSBC
• Lloyds Bank
• National Westminster Bank (NatWest)
• Royal Bank of Scotland (RBS)
The calculated average is rounded up to the nearest 0.25%, and the minimum interest rate comes into effect on the 6th working day of each month, based on the rates 12 working days before.

Yes, a SSAS loan can have a fixed interest rate, provided that the rate is at least the minimum rate specified at the time the loan is made. Once the loan is set at a fixed rate, it will remain unchanged for the life of the loan, as long as no other loan terms are altered.

A: If the interest rate on a SSAS loan falls below the minimum rate specified by HMRC, this results in an unauthorised payment. The amount of the unauthorised payment is based on the shortfall between the applied interest rate and the prescribed rate. This triggers a 40% tax charge on the unauthorised payment for the sponsoring employer. Additionally, the SSAS scheme administrator may incur a scheme sanction charge for not meeting the loan requirements.

A: The maximum repayment term for a SSAS loan to a sponsoring employer is five years from the date the loan was issued. If this term exceeds five years, it will be classified as an unauthorised payment unless rolled over according to specific rules. The amount of the unauthorised payment is calculated based on the total number of days from the loan’s issue date to the actual repayment date compared to the five-year limit.

A SSAS loan term can be extended beyond five years through a rollover if the sponsoring employer faces genuine financial difficulties. The loan repayment date may be postponed for an additional period of up to five years, starting from the standard repayment date. However, a loan can only be rolled over once; rolling it over more than once will result in unauthorised payment tax rules applying.

When a SSAS loan is rolled over, it will not be treated as a new loan, meaning any existing security remains valid, even if its value is less than the loan amount. The five-year term will restart from the date of the rollover. However, if the loan amount is increased, that increase will be considered a new loan, and so will have to be re-tested against loan requirements (ie, the security will have to be revalued, the value of the loan checked again to ensure it does not exceed 50% of the net value of the scheme, and so on).

If a loan is rolled over and the repayment period exceeds five years, the unauthorised payment calculation will commence from the date of the rollover. However, if the repayment terms or total duration of the loan change, the unauthorised payment will be calculated using the formula mentioned previously, based on the extended term.

The maximum total amount that can be loaned in total to sponsoring employers is 50% of the aggregate of the cash sums held and the net market value of the assets of the registered pension scheme, valued immediately before the loan is made. Existing loans to sponsoring employers need to be taken into account when considering whether a new loan to a sponsoring employer would cause a breach of this 50% limit. This limit is set to ensure the liquidity of the pension scheme and to prevent imprudent lending practices.

If a loan exceeds the 50% limit, the excess amount is classified as an unauthorised payment.

No, the 50% limit is applied at the date the loan is made and will not be re-tested at a later date, even if the scheme’s asset value decreases. However, if the terms of the loan are changed, the limit may be subject to reassessment.

Any further advances made after the original loan is considered to be a new loan and would be tested against the 50% limit based on the aggregate value of cash sums and market assets at the time the additional loan is made.

All loans to sponsoring employers must be repayable at least in equal annual instalments of capital and interest, starting from the date the loan is made and continuing through each complete year of the loan term. In practice, this ensures that capital is being paid down throughout the term of the loan, and so interest-only terms with a repayment of capital at the end are not allowable. If the loan is for less than a complete year, that period is treated as the final year.

As noted in 19, repayment terms must comprise at least of equal annual instalments made up of capital and interest. An unauthorised payment, based on the difference between what is mandated in a loan agreement and what is required under legislation, occurs if the loan terms do not meet these requirements.