HMRC Recycling Rules

peterg1965

I have a query regarding recycling rules, which are complex and far from black and white. I have asked about this before, but now have some specific figures:

I am just started my FS salary pension (at 49) and taken the lump sum (slightly increased with some commuation). I have also started a second career with a good salary and need to ensure I tax plan appropriately to not lose my personal allowance.

I have received a Lump Sum (tax free) of £117,000 this month. I also have a SIPP and up to tax year 12/13 I made contribution to my SIPP of £18985 (12/13) £16887 (11/12). I made no contributions in 13/14 and 14/15, due to uncertainty over pension rules (AA/LTA etc). I have now begun to contribute to my SIPP again at the rate of £18000 pa (£1200/month net of tax relief) - all of my contributions are paid monthly via my bank account from salary.

I have not yet done anything with my lump sum, it is just sat in my current account, although I have just made a £10k contribution to my wife's SIPP from our current account. This was effectively from savings.

So, where do I stand with regards to HMRC recycling rules?

kidmugsy

peterg1965 wrote: »

I have received a Lump Sum (tax free) of £117,000 this month. ... I have now begun to contribute to my SIPP again at the rate of £18000 pa (£1200/month net of tax relief) - all of my contributions are paid monthly via my bank account from salary.

I have not yet done anything with my lump sum ...

So, where do I stand with regards to HMRC recycling rules?

As far as HMRC are concerned, they will (I predict) look on that £18000 p.a. as coming from your lump sum on the incontestable grounds that (i) money is fungible, and (ii) HMRC are not stupid. So I suggest you look at their rules again with that in mind.

xylophone

http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0289

might be worth a look.

peterg1965

Thanks, I also downloaded some advice from HL website. Still confusing and not clear for my circumstances.

If they count my £15k as a lump sum, that's about 13% of the overall pension lump sum value. Isn't there something about 30% being a threshold?

Who do I need to talk to for a definitive answer? HMRC? Tax accountant? IFA?

xylophone

There is a flow chart here http://adviser.royallondon.com/technical-central/information-guidance/contributions-and-tax-relief/recycling-of-tax-free-cash/

which you might find helpful.

In your position I would write to HMRC and explain that your pension income together with the income from a new job puts you into a position where you are able to recommence payments into your SIPP similar in amount to what you were able to afford two years ago - however, you are in receipt of a lump sum and do not wish to fall fall of recycling rules - would they please offer guidance.

peterg1965

Thanks xylophone, good point re writing to the HMRC.

Key question for me here:

" are the additional contributions more than 30% of the tax free lump sum received ?" I think my answer is NO.

What this doesn't specify is a time frame. 30% of my lump sum is £35000, I aim to contribute £15000 (net) of my money (HMRC may well see this as from the Lump Sum) into my SIPP over the next 12 months. So, it would take me about 28 months to breach the 30% limit, if there is a time frame put against it.

I will be putting this all in writing to HMRC tonight, in the short term I am absolutely fine, I just need to explain my situation to HMRC and get them to respond and, if required, amend/reduce/maintain my pension contributions.

kidmugsy

My memory is that the key years are the year you took the lump sum, the two years before, and the two years after. So if you spread your 30% across your Lump Sum Year and the next two, you'd be OK.

xylophone

and get them to respond

Will refrain from hollow laughter..:)

Hope you will let us know the outcome...

peterg1965

xylophone wrote: »

Will refrain from hollow laughter..:)

Hope you will let us know the outcome...

Is that me being too hopeful? I am drafting the letter now, at the very least, even if they fail to respond, it gives me the moral high ground! I want to force them to give me a definitive answer!

jamesd

peterg1965 wrote: »

I have received a Lump Sum (tax free) of £117,000 this month.

30% of this lump sum is £35,100. You should ensure that the total increase in your pension contributions for the two tax years before this one, 12/13, 13/14, in this one and the following two years do not exceed this amount if you want to be cautious.

Of note is that the Royal London document referenced by xylophone incorrectly says the current year and two following years, missing the two preceding years.

peterg1965 wrote: »

I also have a SIPP and up to tax year 12/13 I made contribution to my SIPP of £18985 (12/13) £16887 (11/12).

It might be suggested that the 11/12 contribution before the five year period is a suitable baseline amount for your expected contributions. If so, you would be able to pay in five times £16,887 plus the 30%'s £35,100 during the five years without triggering the recycling rule.

peterg1965 wrote: »

I made no contributions in 13/14 and 14/15, due to uncertainty over pension rules (AA/LTA etc).

HMRC could instead argue that you were really paying in nothing and only restarted because you got the lump sum. If they took this tack then you'd be OK up to £35,1000 total for this and the next two tax years, instead of five times 16887 plus 35100.

peterg1965 wrote: »

I have now begun to contribute to my SIPP again at the rate of £18000 pa (£1200/month net of tax relief) - all of my contributions are paid monthly via my bank account from salary.

Depending on how optimistic you are about HMRC using 16887 as the baseline that could be OK or too much (three times it would be over 30%).

peterg1965 wrote: »

I have not yet done anything with my lump sum, it is just sat in my current account, although I have just made a £10k contribution to my wife's SIPP from our current account. This was effectively from savings.

The wife's contribution doesn't matter.

peterg1965 wrote: »

So, where do I stand with regards to HMRC recycling rules?

Depends on how HMRC view it but at the moment you have a clear demonstration that you haven't recycled the lump sum because it's sitting in your current account. If you invest it outside a pension then that'll also make it clear that it wasn't used or any pension recycling. So I suggest that you do that. VCT, ISA, P2P and maybe other unwrapped investments would do the job.

I suggest not contacting HMRC. One of the recycling tests is pre-planning and the more awareness you show of the rule the more likely it is that they would regard you as a person who could have pre-planned.

peterg1965

Thanks James,
my actual contribution of £1200(net) didn't start until this month, so actually this year it will be £13000 and £15000(net) next year, so £28000(net). I assume that the net figure is relevant as it is the actual amount paid in.

It sounds as if I am ok, I have written the HMRC letter, not yet posted but your last comment has made me think twice.

I had originally thought that I would be putting my bonus into my SIPP and also increasing contributions by 2% per annum. My thought now is either to spend the bonus or to put it in my wife's SIPP.

In fact, I may trim down my contributions next year to ensure that i count exceed the £35100 over the 3 tax years. I will just divert to ISA/Wife SIPP for a couple of years then ramp up again in 18/19.