Recycling rules


My total tax free lump sums exceed £7,500 so that meets the criteria for that part.
But, I've had two sums recently in the current tax year, one of 20k and one of 40k with the 20k one being the latter. (Bad timing!).
So my understanding is that in 2023/24, 2023/25 and 2025/26 I am limited to gross contributions of 30% of the last lump sum received, ie 6k over those three tax years and then in 2026/27 I can uplift contributions again. (I intend working part time until 2028 receiving salary of approx 40k). Is this correct or is the total 60k used in the calculation for recycling limits?
Comments
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Organgrinder said:Does anyone know which lump sum counts with regard recycling?
My total tax free lump sums exceed £7,500 so that meets the criteria for that part.
But, I've had two sums recently in the current tax year, one of 20k and one of 40k with the 20k one being the latter. (Bad timing!).
So my understanding is that in 2023/24, 2023/25 and 2025/26 I am limited to gross contributions of 30% of the last lump sum received, ie 6k over those three tax years and then in 2026/27 I can uplift contributions again. (I intend working part time until 2028 receiving salary of approx 40k). Is this correct or is the total 60k used in the calculation for recycling limits?
It's one of the best and most recent articles on this topic and pretty easy to follow, including a flowchart to establish if recycling has happened/is being planned.Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!1 -
Certainly is and it's the one I used. The only thing I'm unclear on is the 30% rules and whether it applies to just the last lump sum (£20k), or the lump sums taken together (£60k).
One allows me to reinvest £6k, the other £18k. This year I get pushed into the higher tax band so I'd like to maximise the advantages of that if possible.
I suppose to play it safe I can do a one off investment of £6k gross and then wait till 2026/27 to reinvest more.0 -
The definitve description of the pension recycling rules is given in https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133800 and subsequent sections.
From looking at Example 2 of the Tax Manual It would appear that 2 lump sums taken in the same year are aggregated for the purpose of checking against the £7K triviality requirement but are not aggregated for the 30% test. However you will need to do your own research.
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Organgrinder said:Does anyone know which lump sum counts with regard recycling?
My total tax free lump sums exceed £7,500 so that meets the criteria for that part.
But, I've had two sums recently in the current tax year, one of 20k and one of 40k with the 20k one being the latter. (Bad timing!).
So my understanding is that in 2023/24, 2023/25 and 2025/26 I am limited to gross contributions of 30% of the last lump sum received, ie 6k over those three tax years and then in 2026/27 I can uplift contributions again. (I intend working part time until 2028 receiving salary of approx 40k). Is this correct or is the total 60k used in the calculation for recycling limits?
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My contributions at the moment at about £6k pa gross so over three years it works out roughly the same either way.
I think the best bet at the moment is to just play safe and keep it under the 30% of the £20k lump sum over 3 tax years.0 -
I have also been wrestling with this same problem which, for me, is the most tortuous tax minefield I've ever encountered, even though the rules, as laid out, are fairly straightforward at face value. I have also taken TFLS's payments straddling the tax year (mid March '21 & mid April '21) because my birthday is just a couple of months before the end / start of the tax year, and I have two large pots. Waiting so they were both in the same tax year wasn't an option and although I was aware of the recycling rules, at the time it didn't seem an issue. So, similar to you, the 40% tax threshold beckons and the natural solution is increasing my salary sacrifice to prevent that issue, however what is the maximum allowed? Well obviously an increase of <30% of the total TFLS eliminates any issues, however is that measured against the total withdrawn (4 weeks apart in my case!) or just the second figure? Also, a 30% uplift is trivial against the 30% of the amount withdrawn. To further complicate matters I have steadily reduced my hours since 2022 so approximately doubling my contributions now would equate to a 30% uplift on contributions 2 years plus ago. Finally, I took another TFLS in Sep '22, however that was less than £7k5 so I'm assuming that that is irrelevant, unless that now extends the measurement window / amounts to measure against? I'm happy for those with better tax planning experience to fill in the gaps in knowledge, however as others have stated, I'm going to keep it safe and keep within the uplift test, however against my salary now or two years ago?0
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pensionpawn said:I have also been wrestling with this same problem which, for me, is the most tortuous tax minefield I've ever encountered, even though the rules, as laid out, are fairly straightforward at face value. I have also taken TFLS's payments straddling the tax year (mid March '21 & mid April '21) because my birthday is just a couple of months before the end / start of the tax year, and I have two large pots. Waiting so they were both in the same tax year wasn't an option and although I was aware of the recycling rules, at the time it didn't seem an issue. So, similar to you, the 40% tax threshold beckons and the natural solution is increasing my salary sacrifice to prevent that issue, however what is the maximum allowed? Well obviously an increase of <30% of the total TFLS eliminates any issues, however is that measured against the total withdrawn (4 weeks apart in my case!) or just the second figure? Also, a 30% uplift is trivial against the 30% of the amount withdrawn. To further complicate matters I have steadily reduced my hours since 2022 so approximately doubling my contributions now would equate to a 30% uplift on contributions 2 years plus ago. Finally, I took another TFLS in Sep '22, however that was less than £7k5 so I'm assuming that that is irrelevant, unless that now extends the measurement window / amounts to measure against? I'm happy for those with better tax planning experience to fill in the gaps in knowledge, however as others have stated, I'm going to keep it safe and keep within the uplift test, however against my salary now or two years ago?
What you describe above is a case in point - you yourself say that you were not even thinking about recycling when you took out the TFLC, and you can very easily argue that you are trying to avoid paying 40% tax which is a normal annual tax management thing that lots of people do.
Also if you read the gov.uk guidelines on this topic, they seem to imply that the 30% increase in pension contributions is the actual amount, and not the amount as a percent of your current income. As such, it appears that going part time, but maintaining the same amount of money to the pension would be within the guidelines, or at least HMRC would have a hard time in court about it.
The other thing is that actually I don't think HMRC tracks this for all taxpayers as they don't actually know how much we are putting in to our pensions unless they specifically decide to investigate an individual. They track what we are taking out of the pension that is taxable.
To be honest I doubt that HMRC bothers much with this because it's not like you can recycle the cash indefinitely like a washing machine. You can only regenerate 25% of the 25% that you took out each time. In practice, this means that even in the optimum case where you had say, a £750K pot, even if you totally abused this, you could only do a few rounds of recycling before the amounts involved would become trivial. As such, putting in a system to enforce this for everybody would probably cost more than the small amounts of tax lost on edge cases.
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Organgrinder said:Does anyone know which lump sum counts with regard recycling?
My total tax free lump sums exceed £7,500 so that meets the criteria for that part.
But, I've had two sums recently in the current tax year, one of 20k and one of 40k with the 20k one being the latter. (Bad timing!).
So my understanding is that in 2023/24, 2023/25 and 2025/26 I am limited to gross contributions of 30% of the last lump sum received, ie 6k over those three tax years and then in 2026/27 I can uplift contributions again. (I intend working part time until 2028 receiving salary of approx 40k). Is this correct or is the total 60k used in the calculation for recycling limits?
Pension Recycling | PruAdviser (mandg.com)"3. the cumulative amount of the additional contributions exceeds 30% of the PCLS
The test is for increased contributions over the cumulative period exceeding 30% of the PCLS. The cumulative period includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years following this date.
Importantly, this rule refers to the single PCLS payment received at this benefit crystallisation event. It is not the total amount of PCLS paid in the 12 month period considered above."
As I understand it, someone could get a large PCLS of say £100k shortly after the start of the tax year and assume they could pay increased contributions of £30k. Then they receive a much smaller PCLS of say £10k later in the tax year and are now restricted to only £3k increased contributions. Seems a bit unfair if they have already started paying in the larger increased contributions?
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Audaxer said:Organgrinder said:Does anyone know which lump sum counts with regard recycling?
My total tax free lump sums exceed £7,500 so that meets the criteria for that part.
But, I've had two sums recently in the current tax year, one of 20k and one of 40k with the 20k one being the latter. (Bad timing!).
So my understanding is that in 2023/24, 2023/25 and 2025/26 I am limited to gross contributions of 30% of the last lump sum received, ie 6k over those three tax years and then in 2026/27 I can uplift contributions again. (I intend working part time until 2028 receiving salary of approx 40k). Is this correct or is the total 60k used in the calculation for recycling limits?
Pension Recycling | PruAdviser (mandg.com)"3. the cumulative amount of the additional contributions exceeds 30% of the PCLS
The test is for increased contributions over the cumulative period exceeding 30% of the PCLS. The cumulative period includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years following this date.
Importantly, this rule refers to the single PCLS payment received at this benefit crystallisation event. It is not the total amount of PCLS paid in the 12 month period considered above."
As I understand it, someone could get a large PCLS of say £100k shortly after the start of the tax year and assume they could pay increased contributions of £30k. Then they receive a much smaller PCLS of say £10k later in the tax year and are now restricted to only £3k increased contributions. Seems a bit unfair if they have already started paying in the larger increased contributions?
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pensionpawn said:Audaxer said:Organgrinder said:Does anyone know which lump sum counts with regard recycling?
My total tax free lump sums exceed £7,500 so that meets the criteria for that part.
But, I've had two sums recently in the current tax year, one of 20k and one of 40k with the 20k one being the latter. (Bad timing!).
So my understanding is that in 2023/24, 2023/25 and 2025/26 I am limited to gross contributions of 30% of the last lump sum received, ie 6k over those three tax years and then in 2026/27 I can uplift contributions again. (I intend working part time until 2028 receiving salary of approx 40k). Is this correct or is the total 60k used in the calculation for recycling limits?
Pension Recycling | PruAdviser (mandg.com)"3. the cumulative amount of the additional contributions exceeds 30% of the PCLS
The test is for increased contributions over the cumulative period exceeding 30% of the PCLS. The cumulative period includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years following this date.
Importantly, this rule refers to the single PCLS payment received at this benefit crystallisation event. It is not the total amount of PCLS paid in the 12 month period considered above."
As I understand it, someone could get a large PCLS of say £100k shortly after the start of the tax year and assume they could pay increased contributions of £30k. Then they receive a much smaller PCLS of say £10k later in the tax year and are now restricted to only £3k increased contributions. Seems a bit unfair if they have already started paying in the larger increased contributions?
Hence why my suspicion is that HMRC don't enforce this at all unless you are blatantly abusing it - for example by taking the TFC on Monday, paying it all back in on Tuesday, taking your next TFC on Wednesday etc.0
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