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Recycling rules

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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Comments

  • Marcon
    Marcon Posts: 12,912 Forumite
    Eighth Anniversary 10,000 Posts Name Dropper Combo Breaker
    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?
    See https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/ 

    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!  
  • Organgrinder
    Organgrinder Posts: 539 Forumite
    Tenth Anniversary 500 Posts Name Dropper Combo Breaker
    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.
  • Linton
    Linton Posts: 17,924 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Hung up my suit!
    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.

  • Pat38493
    Pat38493 Posts: 3,122 Forumite
    Tenth Anniversary 1,000 Posts Name Dropper Combo Breaker
    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?
    Also I guess you can exceed 30% of the lump sum you took out, but there is also the 30% test on pension contributions increases - i.e. if the increase in your contributions was less than 30% over the time measured, it would still be ok.


  • Organgrinder
    Organgrinder Posts: 539 Forumite
    Tenth Anniversary 500 Posts Name Dropper Combo Breaker
    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.
  • pensionpawn
    pensionpawn Posts: 995 Forumite
    Seventh Anniversary 500 Posts Name Dropper
    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?                                                                                                                                                                            
  • Pat38493
    Pat38493 Posts: 3,122 Forumite
    Tenth Anniversary 1,000 Posts Name Dropper Combo Breaker
    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?                                                                                                                                                                            
    There was a recent meaningful money video on Youtube about this, and interestingly in all 3 of the examples he used, he could not definitively say that recycling had happened, as the test that you must have done it deliberately in order to recycle tax free cash, would be very hard for HMRC to prove in court unless you openly said you were doing it only for that reason.  They have to prove that you did it on purpose for that reason - you don't have to prove that you didn't.

    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.


  • Audaxer
    Audaxer Posts: 3,547 Forumite
    Seventh Anniversary 1,000 Posts Name Dropper
    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?
    The page below says it is for the single PCLS. See below:
    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?

  • pensionpawn
    pensionpawn Posts: 995 Forumite
    Seventh Anniversary 500 Posts Name Dropper
    Audaxer 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?
    The page below says it is for the single PCLS. See below:
    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?

    ...and just to make it even more confusing we have to determine what is actually meant by additional contributions, which are checked across two tests, and what determines the timeframe. The guidance suggests that this is "contributions above what would normally be expected had the TFLS had not been taken". So you could argue if someone was salary sacrificing 10% 2 years prior to taking their TFLS(s) then they can safely increase their contributions to 12.99% regardless of what amount was actually withdrawn. The guidance suggests that salary increase would not adversely impact the 30% uplift test, however can I be so sure that a voluntary reduction in hours / salary would also not adversely impact the uplift test. For example would HMRC attempt to argue that Joe Bloggs's reduction of hours was part of his "Baldrickesq" plan to "buy space" to then increase his contributions to the level (in £'s) that he was contributing two years (i.e. the level of contributions he had prior to the TFLS been taken) previous PLUS another 30%? My head is on fire.... Then there's the timeline. I took two TFLS's four weeks apart in two different tax years: 20/21 & 21/22. If the total payments against TFLS value test is made against the later TFLS that implies that the 5 year tax year window is: 19/20 - 23/24 and not 18/19 - 22/23 which is important to confirm as no doubt contributions will be maxed out after the 5 year window! If the timeframe is measured against the first TFLS then my 5 year window ended in March and I can max out this year, unless the sub £7k5 TFLS in the 22/23 tax year further complicates matters (brain explodes...)
  • Pat38493
    Pat38493 Posts: 3,122 Forumite
    Tenth Anniversary 1,000 Posts Name Dropper Combo Breaker
    Audaxer 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?
    The page below says it is for the single PCLS. See below:
    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?

    ...and just to make it even more confusing we have to determine what is actually meant by additional contributions, which are checked across two tests, and what determines the timeframe. The guidance suggests that this is "contributions above what would normally be expected had the TFLS had not been taken". So you could argue if someone was salary sacrificing 10% 2 years prior to taking their TFLS(s) then they can safely increase their contributions to 12.99% regardless of what amount was actually withdrawn. The guidance suggests that salary increase would not adversely impact the 30% uplift test, however can I be so sure that a voluntary reduction in hours / salary would also not adversely impact the uplift test. For example would HMRC attempt to argue that Joe Bloggs's reduction of hours was part of his "Baldrickesq" plan to "buy space" to then increase his contributions to the level (in £'s) that he was contributing two years (i.e. the level of contributions he had prior to the TFLS been taken) previous PLUS another 30%? My head is on fire.... Then there's the timeline. I took two TFLS's four weeks apart in two different tax years: 20/21 & 21/22. If the total payments against TFLS value test is made against the later TFLS that implies that the 5 year tax year window is: 19/20 - 23/24 and not 18/19 - 22/23 which is important to confirm as no doubt contributions will be maxed out after the 5 year window! If the timeframe is measured against the first TFLS then my 5 year window ended in March and I can max out this year, unless the sub £7k5 TFLS in the 22/23 tax year further complicates matters (brain explodes...)
    Well good luck getting any clarification on those points - posts on other threads in the past have indicated that there have never been any court cases about this topic, nobody on these boards has ever encountered anyone who has actually been penalised or even challenged by HMRC about it, and I think they said that some IFAs had even tried to make freedom of information requests to HMRC to try to find out how many people paid a penalty for pension recycling in the past and HMRC said it would be "too cumbersome" to retrieve the information.

    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.
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