Tax charges for Pension Scheme Trustees and Providers

After a short break to enjoy the sunny Bank Holidays, we return with the third article in our new tax series to be published throughout 2025 in which TLT’s team of tax specialists will be looking at specific tax issues arising in the financial services sector.

In our work in the Financial Services Sector, we regularly advise the trustee arm of our Financial Services clients and so in this article our tax and pensions specialists consider the tax charges which trustees and providers of SIPP and SSAS pension schemes may become liable to pay.

As our practice also includes advising the trustees of death in service benefit trusts, later in this series we will look at common pitfalls concerning HMRC’s reporting requirements and how to rectify errors.

Complying with Finance Act 2004 (FA 04)

Registered pension schemes provide for members to take benefits once they are aged 55 or over. SIPP and SSAS pension schemes permit a wide range of investments that a member may wish to explore to grow their pension savings before retirement age.

We are often asked by trustees of SIPPs and SSASs whether a proposed investment by way of a loan to a company can be an authorised loan that complies with the legislation set out in FA 04. The strict rules aim to protect retirement savings. A loan to a member by their SIPP or SSAS, or to a person connected with them, is an unauthorised payment and subject to penal tax charges described below, but a genuine commercial loan to a third party is possible. It is therefore necessary to check that the lendee company is not connected to the member. The test is set out in section 993 of the Income Tax Act 2007. This broadly means spouses, civil partners and relatives as well as relatives of spouses and civil partners and spouses and civil partners of relatives. For loans from SIPPs or SSASs, questions must therefore be raised as to who is involved in the lendee company.

Similarly, a SSAS may make an authorised loan to its sponsoring employer provided always that the five tests set out in section 179 FA 04 are met. These relate to:

• the amount of the loan;
• the term of the loan;
• the interest rate;
• the repayment terms; and
• the security.

Tax charges

If a loan to a person connected to a member is made by a SIPP or SSAS, or a loan by a SSAS to a sponsoring employer fails any of the section 179 FA 04 tests, there will be an unauthorised payments charge under section 208 FA 04 on the value leaving the scheme. This may be the full value of the loan or, for a SSAS loan to a sponsoring employer, the shortfall between the value of the asset used for the security and the value of the loan. The unauthorised payments charge on the member is an automatic charge; any subsequent repayment of the funds is ignored.

Once an unauthorised payment has been made, there can be:

• an unauthorised payments surcharge under section 209 FA 04 if the unauthorised payment is more than 25% of the value of the pension scheme fund immediately before the transaction; and
• a scheme sanction charge which is the primary liability of the scheme administrator under section 239 FA 04. The scheme administrator is commonly the trustees of a SSAS or the operator of a SIPP.

The tax charges are significant; the unauthorised payments charge is calculated at 40% of the value of the unauthorised payment, the surcharge is 15%. The scheme sanction charge is a 40% tax charge, unless the unauthorised payments charge is paid in which case it is reduced to 15%.

We often see HMRC issue assessments on the basis that all of the charges apply, and it will be for the taxpayer or the scheme administrator to prove otherwise.

Statutory defence

There is, however, a statutory defence to the scheme sanction charge which is found in section 268 FA 04. It is a two limbed test:

• that the scheme administrator reasonably believed that the unauthorised payment was not a scheme chargeable payment; and
• that in all the circumstances of the case it would not be just and reasonable for the scheme administrator to be liable to the scheme sanction charge.

There is now a body of caselaw which sets out how the Tax Tribunal approaches section 268. The early cases suggested that the scheme sanction charge might aim to recover tax relief given for contributions to the scheme rather than to punish the unauthorised payment. Later cases have deemed this speculative, rather the scheme administrator is expected to understand and prevent scheme chargeable payments, ensuring proper supervision, and the administrator will only be discharged if the payment occurs despite reasonable efforts. For the first limb of the test to be met, the Tax Tribunals have set out that for a belief to be reasonable, it must be based on reasonable grounds and tested by reference to critical thinking. In respect of the second limb of the test, the Tax Tribunals have considered what this means. And whilst the ultimate repayment of a loan may be at the less serious end of the spectrum and a significant element of the test, it cannot be the only element in the context of a set of provisions which include other specific tests which are applied at the time when the loan is entered into, not at the time when it is repaid.

Practicalities and prevention

The taxpayer and scheme administrator will need to appeal the underlying tax assessments, i.e. each of the three charges and separately will need to apply for relief from the surcharge and the scheme sanction charge. In reality, this means managing a number of different appeals and applications concurrently. Arguments as to why the surcharge and the scheme sanction charge should be withdrawn must be carefully considered in the context of a particular case and the evidence available in support.

Of course, prevention measures are key. Professional trustees and scheme administrators with strong governance and robust internal controls, operating regular audits, and staff training will be best placed to spot potential issues before they occur or if an unauthorised payment does take place will have evidence to demonstrate they made reasonable efforts to comply with FA 04.

We have specialist pensions and tax lawyers who can provide advice on proposed investments by SIPP and SSAS schemes and prepare internal control policies to mitigate risks for trustees and scheme administrators. We advise on standard terms and documentation for lending to SIPP and SSAS pension schemes and for loans from such schemes.

We can also provide advice in connection with any discussions with HMRC or proposed challenges to tax assessments. Our team of specialist tax lawyers have experience in leading appeals to the First-tier Tax Tribunal and the Upper Tribunal.

As caselaw continues to impose strict requirements on professional trustees and scheme administrators, due diligence remains of utmost importance.

TLT comment

Emma Bradley, Partner in our Tax Team says ….. “The importance of having robust internal controls as part of a trustee’s decision making processes is key not only in preventing unauthorised payments but can also serve two-fold in providing contemporaneous evidence that a trustee acted reasonably, had a reasonable belief and applied critical thinking should HMRC open an enquiry into a pension scheme.”

How can we help?

Our Tax team has a wealth of experience providing commercial and insightful advice to national and international banks, building societies, other funders and institutions in the financial services sector and their high-net-worth clients.

We offer a tax structuring and advisory service to clients as part of our national reach, as well as tax transactional support on business and real estate transactions.

We advise on all aspects of pensions law and regulation. We are experts in SIPP, SSAS and master trust pension products. We also have niche expertise in employer-financed retirement benefits schemes (EFRBS) and legacy funded unapproved retirement benefits schemes (FURBS). We advise operators, professional trustees, scheme administrators and independent financial advisers on the full range of legal issues relating to these schemes.

If you are interested in discussing any of the topics covered in this article, get in touch with our Tax and Pensions specialists below.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2025. Specific advice should be sought for specific cases. For more information see our terms & conditions.