SSAS loan rules

The five key tests for an authorised employer loan

A SSAS pension can lend up to 50% of its net assets back to its sponsoring employer. This is one of the features that makes a SSAS pension uniquely powerful for company directors. But the loan must meet five specific tests set by HMRC under Section 179 Finance Act 2004. A loan that fails any test becomes an unauthorised payment — attracting tax charges on the employer and a scheme sanction charge on the administrator.

The five tests are: security, interest rate, term of loan, maximum amount, and repayment terms.

1. Security

The loan must be secured throughout its full term by a first charge on an asset owned by the sponsoring employer (or another person). At the time the loan is made, the security must be worth at least as much as the face value of the loan including interest. No other charge can take priority over the scheme's charge on that asset.

If the security asset is replaced, the replacement must be worth at least the lower of: the market value of the original asset, or the outstanding loan amount including interest. Where a transaction reduces the value of the security below the outstanding loan amount, an unauthorised payment arises equal to the shortfall.

2. Interest rate

The scheme must charge at least the prescribed minimum interest rate, set by The Registered Pension Schemes (Prescribed Interest Rates for Authorised Employer Loans) Regulations 2005 (SI 2005/3449). The minimum is 1% above the average of the base lending rates of six specified clearing banks: Bank of Scotland, Barclays, HSBC, Lloyds, NatWest, and Royal Bank of Scotland.

The rate is rounded up to the nearest 0.25% and is calculated on the 12th working day before the operative date (the 6th working day of each month). A fixed-rate loan is permitted provided it meets the prescribed rate at inception. Where the interest rate charged is below the prescribed rate, the unauthorised payment is calculated by the formula: (100 − [(IR/PIR) × 100]) ÷ 100 × amount outstanding.

3. Term of loan

The repayment period must not exceed five years from the date the loan is made. A loan with a term longer than five years triggers an unauthorised payment calculated by reference to the excess days over the five-year period. The formula is: ((days in actual term ÷ days in five-year term) × 100 − 100) × amount outstanding ÷ 100. The unauthorised payment cannot exceed the full outstanding balance.

A loan may be rolled over once — extending the repayment date by up to a further five years — where the employer has genuine repayment difficulties. A rollover is not treated as a new loan, so existing security continues. Any increase to the original loan amount is treated as a new loan and tested separately.

4. Maximum amount of loan

The loan must not exceed 50% of the aggregate of cash sums held and the net market value of all scheme assets, valued immediately before the loan is made. The 50% test is applied at the date the money is lent and is not re-tested if asset values subsequently fall (unless the loan terms are changed). Further advances after the original loan are treated as new loans made on the date of the advance.

Where a loan exceeds the 50% limit, the excess is an unauthorised payment calculated as: (amount loaned ÷ 50% of scheme value × 100 − 100) × 50% of scheme value ÷ 100.

5. Repayment terms

The loan must be repayable in at least equal annual instalments of capital and interest, calculated from the date the loan is made. For each loan year, the cumulative amount repaid must meet the "required amount" set by the formula: ((loan + total interest payable) ÷ total loan years) × number of loan years elapsed.

An unauthorised payment arises if the amount due in any loan year falls below the required amount. The charge is based on the largest shortfall across all loan years.

Pre-April 2006 loans

Loans made before 6 April 2006 are not subject to the current rules provided the scheme became a registered pension scheme, no repayment terms were altered on or after 6 April 2006, and the repayment date falls after 6 April 2006. A single rollover of a pre-2006 loan is permitted on or after that date without triggering the current rules, subject to the same conditions as above.

The full legislative basis is set out in the HMRC Pensions Tax Manual PTM123200. For the broader SSAS investment and loanback overview, see SSAS pension loans explained and HMRC rules for SSAS pensions.