HMRC Recycling Rules

xylophone

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.

It is explained when you click on the "Conditions" under the chart - "

See

"3 Significant increase in contribution level

Because of the payment of the tax-free lump sums, have the contributions increased by more than 30% of what might have been expected?

At first hand this appears to be quite a vague condition. However, it's actually very specific. HMRC can look at the contributions paid in the remainder of the tax year after the point at which the tax-free cash is taken plus up to two subsequent tax years. This would then be compared with the contributions paid in the similar period before the tax-free cash was taken. That's potentially five tax years in total. This applies to member, employer and third party contributions.

Recycling may not apply if a member's contributions increased because they are linked to salary, bonus, overtime or commission as long as the basis on which the pension contribution is based hasn't changed."

My inclination would be to confirm with HMRC but "yer pays yer money and yer takes yer choice..":)

jamesd

peterg1965 wrote: »

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's the gross that is relevant, not the net. The amount that ends up in the pension.

peterg1965 wrote: »

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.

Think two or three times then read xylophone's ""yer pays yer money and yer takes yer choice" which is entirely correct in an area of uncertainty about HMRC will view things. Ultimately it's you who will bear the consequences and you who have to act in the manner that you're comfortable with.

peterg1965 wrote: »

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.

Variable bonus is unpredictable income so I think it's safe enough to pay into a pension of your own.

peterg1965 wrote: »

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.

Shame you're not comfortable with VCTs, though. HMRC ends up suffering an ongoing tax loss by making me file tax returns and getting me comfortable with making them....

xylophone, yet there's that two subsequent years bit first. I agree that they do eventually mention five but I'm not surprised I first read it as I did.

xylophone

xylophone, yet there's that two subsequent years bit first. I agree that they do eventually mention five but I'm not surprised I first read it as I did.

I see what you mean - you do have to read through all the additional explanations underneath.

I seem to remember the "recycling" discussion coming up a year or so back during the MikeFloutier saga and commenting that with HMRC, there's the Humpty Dumpty factor....:)
http://www.goodreads.com/quotes/12608-when-i-use-a-word-humpty-dumpty-said-in-rather

jamesd

It's the additional explanation underneath that was the problem: "HMRC can look at the contributions paid in the remainder of the tax year after the point at which the tax-free cash is taken plus up to two subsequent tax years" and "This would then be compared with the contributions paid in the similar period before the tax-free cash was taken". It seems quite clear to me on reading it that the five years that they are writing about mean two years to set the comparison baseline, then the year of taking the lump sum and following two.

That's a genuine difference between my understanding given in my earlier answers in this topic and theirs so I'm doing more research on it, because my own understanding might be wrong.

RPSM04104950 has the description of the rule:

"What is the cumulative basis on which the significant increase of contributions is based?

[Paragraph 3A Schedule 29]

An individual planning to increase contributions significantly to a registered pension scheme when taking a pension commencement lump sum does not avoid the “significant increase” test by increasing contributions piecemeal or gradually over time. It does so by providing for contributions to be measured over a set period of time in determining whether or not there has been a significant increase in contributions.

The period of time is:

the tax year in which an individual takes a pension commencement lump sum with the intention of using it to make significantly increased contributions to a registered pension scheme
the 2 tax years immediately preceding the tax year in which the individual took the lump sum, and
the 2 tax years immediately following the tax year in which the individual took the lump sum."

And I've taken that to mean that all five years are included in the increase calculation. While the Royal London document describes the first to as used for establishing the baseline level and only the later three for calculating the increase.

I arrived at my reading by things like reading RPSM04104930:

"Alternatively, when an individual takes these steps:

decides to use a pension commencement lump sum as the means to significantly increase contributions to a registered pension scheme, and then
pays the significantly increased contributions or otherwise arranges for them to be paid, and then
receives the lump sum

pre-planning occurs when the significantly increased contribution is made - this is the “relevant time”."

which envisions payments before taking the lump sum as potentially problematic.

There's an example of cumulative basis in RPSM04104990 but unfortunately it doesn't specify two years before as providing the comparison basis:

"Example 6 - Illustration of the cumulative basis

In the tax year (year 1) in which a pension commencement lump sum of £35,000 is received by a scheme member, who intended to use that lump sum to increase contributions to a registered pension scheme, the contributions to registered pension schemes relating to that member increase from the previous 10 years’ annual contributions of £10,000 to £10,500 - as it is an increase of 5%, the amount by which the contributions have increased in that year is not a significant increase."

jamesd

Now, that's about what Royal London says and my understanding. But you also linked to a Scottish Widows document and that says that for it to be recycling:

"The cumulative amount of additional contributions must exceed 30% of the PCLS in the 2 tax years before or after receipt of the PCLS"

near the start and this near the end:

"Due to the risk of unauthorised payment tax charges, a substantial PCLS (greater than £15,000) should not be used directly or indirectly to cover significantly increased pension contributions up to three years either side of taking the lump sum"

There's a Standard life document Recycling of lump sums which says:

"To work out the total increase in payments, HMRC can look at the two tax years before you took your tax-free lump sum, plus the year you received it and the two tax years after"

and:

"Is the increase more than 30% of your tax-free lump sum?

The total increase is checked over a five year period:
o The tax year you take the tax-free lump sum,
o The two tax years before, and
o The two tax years after"

MetLife has a document Technical Bulletin – Recycling of pension commencement lump sums:

"Does the cumulative amount of the additional contributions exceed 30% of the pension commencement lump sum? (Take into account the current tax year as well as the previous two and subsequent two tax years)"

SW, SL and MetLife appear to envision using the cumulative basis as I've been using it: baseline set three more more years before lump sum, cumulative increase added up over the two years before, the year of taking and the two years after.

At this point I'm interested in more evidence either way.

peterg1965

This now gets to become even more of a headache!

I also contribute to my new employers DC pension scheme, currently 4% of salary and matched with 6% employer contributions. Reading the HMRC rule book, these are also taken into consideration within the Recycling rules.

Crikey, this is a real minefield. It seems the hard and fast rule is the 30% of the PCLS over a 5 year period. But, does this include employer contributions ? And should I include all tax reliefs up to 40%.

My head is about to explode !

TH1878

Three important points here:

1) The tax free cash recycling has to be pre-planned.
2) HMRC have stated that normal retirement planning (such as a workplace pension scheme) will not be caught by these rules.
3) Axa looked into this on our behalf and, we believe, there is not one instance of HMRC taking anyone to court over this.

As an aside, see if your employer will change your contributions to a salary exchange / sacrifice scheme. Much harder to prove tax free cash recycling if your employer is making the payments.

peterg1965

My employer does pay DC pension contributions via salary sacrifice (SMART).

Deneb

I have been in a similar position to you since 2011. I took the decision to pay into a personal pension for the two tax years following the year of my retirement an amount sufficient to mitigate my HRT liability, but no more. Irrespective of whether this amount would breach any other recycling conditions, RPSM04104990 (examples of where the recycling rules would not apply) states that:

"Other circumstances where contributions might fluctuate but are still paid on a set basis are where a member pays contributions each year equal to the amount of the member’s UK earnings that would ordinarily be over the threshold for higher rate tax or where contributions are based on a percentage of self-employed profits."

I informed HMRC that it was my intention to do this in advance and had my tax code adjusted by return. It has since been adjusted annually on the basis that similar contributions will continue with no further intervention from myself.

jamesd

peterg1965 wrote: »

I also contribute to my new employers DC pension scheme, currently 4% of salary and matched with 6% employer contributions. Reading the HMRC rule book, these are also taken into consideration within the Recycling rules.

Yes, they are. All contributions to a money purchase pension in your name are counted. contributions to defined benefit are not counted (for this or the money purchase annual allowance introduced in April, they do count towards the overall annual allowance).

peterg1965 wrote: »

Crikey, this is a real minefield. It seems the hard and fast rule is the 30% of the PCLS over a 5 year period. But, does this include employer contributions ? And should I include all tax reliefs up to 40%.

The amount arriving in the pension is what counts. So yes, it includes reliefs, and any employer NI that ends up in the pension.

peterg1965 wrote: »

My head is about to explode !

You clearly are starting to understand it well. That is the correct reaction.