Caitlin Southall

Caitlin Southall
Head of SSAS Proposition

In simple terms and in a SSAS, an unauthorised payment is any transaction that doesn’t meet HMRC’s strict criteria for authorised payments. These payments attract significant penalties.

There are two types of unauthorised payments:

  • Unauthorised member payments

  • Unauthorised employer payments

Authorised payments cover most routine transactions, such as benefit payments (for members over 55), death benefits, pension sharing orders, authorised loan backs, and transfers to registered schemes. Anything outside these boundaries, such as loans to employers on non-commercial terms or benefits paid before the Normal Minimum Pension Age (NMPA) without qualifying criteria, is likely to be unauthorised.

The SSAS world has been abuzz with speculation following HMRC’s latest position on Pension Commencement Lump Sum (PCLS) returns. This conversation gained momentum after Rachel Reeves’ much-anticipated inaugural budget in November 2024. While changes to PCLS treatment were heavily rumoured, none materialised. Yet, fear-driven decisions were made and many individuals hurriedly accessed their tax-free cash, worried the privilege might be curtailed or eliminated altogether.

Unfortunately, this haste has come with potential pitfalls. HMRC clarified in their pension schemes newsletter 165, that there is no cooling-off period for tax-free cash withdrawals. Once withdrawn, attempting to return the funds into the pension risks triggering punitive tax charges due to recycling rules. For those who acted too quickly, this could mean steep financial consequences.

The Stakes: HMRC’s Tax Penalties

The repercussions of unauthorised member payments and unauthorised employer payments are serious, with HMRC wielding a range of tax charges designed to deter non-compliance:

  1. Unauthorised Payment Charge

    • A hefty 40% tax on the unauthorised amount.
    • This applies to the recipient and this will determine whether it is an unauthorised member payment, or an unauthorised employer payment.
    • Notably, this charge can’t be paid by the pension scheme itself and doing so, would create a vicious cycle of further unauthorised payments.
  2. Unauthorised Payment Surcharge

    • An additional 15% penalty applies if unauthorised payments in a 12-month period exceed 25% of the member’s fund share or the employer’s scheme value.
  3. Scheme Sanction Charge

    • Levied against scheme administrators, this charge is 40% of the unauthorised payment’s value but can drop to 15% if the initial unauthorised payment charge is settled.
    • The “good faith provision” may provide relief for administrators unaware of the infraction.
  4. De-registration Charge

    • If unauthorised payments exceed 25% of the scheme’s value within a year, HMRC can deregister the scheme entirely, imposing a 40% tax on all scheme assets.

Avoiding the Unauthorised Payment Trap

The penalties for unauthorised member payment and unauthorised employer payments can be devastating, potentially eroding retirement savings or imposing financial burdens on employers. Navigating these rules requires careful planning and professional advice. Consulting a suitable pension scheme administrator, professional trustee or financial adviser can help ensure that actions align with HMRC regulations and safeguard your pension’s integrity.

Further guidance is also available in HMRC’s Pension Tax Manual (PTM132000).

In the world of pensions, caution and clarity are paramount and don’t let panic decisions derail your financial future.