Small business owners often seek innovative ways to secure financing and manage their financial affairs efficiently.
One such method gaining popularity is the use of a Small Self-Administered Scheme (SSAS) to facilitate a loan from your pension fund back to your limited company.
This strategy offers a range of benefits for business owners. In this article, we'll delve into the concept of using a SSAS for a loan back to your limited company, and how it can be a powerful tool for business success.
What is a SSAS?
A Small Self-Administered Scheme (SSAS) is a type of workplace pension scheme designed for small businesses. It offers a level of flexibility and control that larger pension schemes do not.
A SSAS is typically established and administered by the sponsoring employer, making it an attractive option for business owners looking to take advantage of its unique features.
The Loan Back to the Sponsoring Employer
A key feature of a SSAS is its ability to lend money to the sponsoring employer. This loan can be a valuable financial tool for businesses in various scenarios.
The SSAS can provide a loan to the company or employer that established the scheme. This loan is typically extended by the SSAS trustees to the sponsoring employer, and it must adhere to certain rules and regulations set forth by HM Revenue and Customs (HMRC).
Here's how it generally works:
1. Establishment of a SSAS:
Firstly your business will need to establish a SSAS. The members of the SSAS are typically the directors of the sponsoring employer, but can include any employees that you wish to invite to the scheme.
2. Loan Request:
The sponsoring employer requests a loan from the SSAS. This request should be in line with the SSAS's trust deed and rules and comply with HMRC regulations. The maximum permitted loan is 50% of the scheme’s net assets at the day the loan Is granted.
3. Trustees' Decision:
The trustees of the SSAS, who may include the business owner or directors, review the loan request. They must ensure that the loan is made on commercial terms, meaning it is a genuine business transaction and the terms of the loan (e.g., interest rate, repayment schedule) are fair and reasonable.
4. Loan Agreement:
If the trustees approve the loan, a formal loan agreement is drawn up between the SSAS and the sponsoring employer. This agreement outlines the terms and conditions of the loan, including the interest rate and repayment schedule.
5. Repayment:
The sponsoring employer is responsible for repaying the loan according to the agreed-upon terms. The repayments, including both principal and interest, go back into the SSAS, increasing the pension fund's value.
6. Interest Rate:
The interest rate charged on the loan should be set at a commercial rate, typically based on prevailing market rates. Charging an excessively low-interest rate could raise concerns with HMRC.
7. Security and Collateral:
The SSAS will require the sponsoring employer to provide collateral or security for the loan. This usually means a first charge on an unencumbered asset, such as your business premises or other property.
8. HMRC Compliance:
It's crucial that the loan arrangement complies with HMRC rules and regulations. Failure to do so could lead to tax penalties and consequences.
The primary advantage of a loan back to the sponsoring employer via a SSAS is that it provides a source of financing for the business while also growing the pension fund.
Interest received on the loan is typically not subject to income tax, making it a tax-efficient way to use pension funds for business purposes. However, it's important to ensure that the loan arrangement is conducted on commercial terms and that all legal and regulatory requirements are met to avoid potential tax penalties or issues with the pension scheme's status. Consulting with our financial planners considering this type of financial arrangement.
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A pension is a long-term investment not normally accessible until 55 (57 from April 2028).