Would HMRC think this was lump sum recycling?

GenX0212

I am a Higher Rate taxpayer earning >£60k, my wife is a Basic Rate taxpayer.
Together we have savings in various places totalling approx. £40k.

My usual annual pension contributions are between £20k-£30k per year via Salary Sacrifice and AVC contributions.

If I were to invest the £40k savings back into a pension scheme then it would receive automatic Basic Rate Tax Relief and I could then claim back Higher Rate relief through my self assessment. So far so good.

My aim is to retire next year and when I start drawing my DB pension I will receive a £37k lump sum.

HMRC guidance itself says that this allowed as part of normal retirement planning PTM133810 - Unauthorised payments: Deemed or specific situations that are unauthorised payments: recycling of pension commencement lump sums: overview - HMRC internal manual - GOV.UK (www.gov.uk) but the amounts are so similar that on the face of it it looks like I have borrowed £40k in order to gain a tax advantage against my expected £37k lump sum.

Would HMRC put 2 and 2 together to make 5 and think this was lump sum recycling?
The guidance/interpretation is murky and it appears it comes down to what HMRC think you have done not necessarily what you have actually done. Is it likely to trigger an investigation and how complex could this get?

The other way I could approach this is to increase my AVC's significantly and for us to live off of our savings in the interim.

BoGoF

Just to be clear - is your £60k+ earnings net of any salary sacrifice?

I see nothing wrong with your proposal - lots of people max out contributions in the year before retirement. 

bjorn_toby_wilde

Can’t see anything wrong with it either.

I maxed out my contributions before I retired at the end of 2022. In fact I used up previous years’ allowances too because I had savings that I couldn’t move into an ISA wrapper. I then took a lump sum from my DB pension. It all went on my tax return and caused no problem with HMRC

GenX0212

BoGoF said:

Just to be clear - is your £60k+ earnings net of any salary sacrifice?

I see nothing wrong with your proposal - lots of people max out contributions in the year before retirement. 

Are you thinking that I would be hitting the annual limit? If I pay in the £40k on top of my existing contributions I would be able to use the carry forwards rule if it goes above the annual limit as I would have £10-20k remaining allowance from each of the previous 2 years.

NoMore

Every thread about the recycling rules eventually gets to the point that HMRC aren’t interested in the individual doing sensible retirement planning. The rules are aimed at firms advising to do this. As far as we are aware no individual has ever been investigated under the recycling rules. The it must be pre planned rule would be extremely hard to prove in court. 

Ivkoto

This man have a lot of very useful videos



https://youtu.be/ql_a2VMzAj8?si=YmagDNmNneIEDq7O

BoGoF

GenX0212 said:

BoGoF said:

Just to be clear - is your £60k+ earnings net of any salary sacrifice?

I see nothing wrong with your proposal - lots of people max out contributions in the year before retirement. 

Are you thinking that I would be hitting the annual limit? If I pay in the £40k on top of my existing contributions I would be able to use the carry forwards rule if it goes above the annual limit as I would have £10-20k remaining allowance from each of the previous 2 years.

Assuming you have sufficient relevant earnings you can use carry forward. If your relevant earnings were £40k for example that ia the maximum you can get tax relief on regardless of any carry forward available.

Pat38493

GenX0212 said:

I am a Higher Rate taxpayer earning >£60k, my wife is a Basic Rate taxpayer.
Together we have savings in various places totalling approx. £40k.

My usual annual pension contributions are between £20k-£30k per year via Salary Sacrifice and AVC contributions.

If I were to invest the £40k savings back into a pension scheme then it would receive automatic Basic Rate Tax Relief and I could then claim back Higher Rate relief through my self assessment. So far so good.

My aim is to retire next year and when I start drawing my DB pension I will receive a £37k lump sum.

HMRC guidance itself says that this allowed as part of normal retirement planning PTM133810 - Unauthorised payments: Deemed or specific situations that are unauthorised payments: recycling of pension commencement lump sums: overview - HMRC internal manual - GOV.UK (www.gov.uk) but the amounts are so similar that on the face of it it looks like I have borrowed £40k in order to gain a tax advantage against my expected £37k lump sum.

Would HMRC put 2 and 2 together to make 5 and think this was lump sum recycling?
The guidance/interpretation is murky and it appears it comes down to what HMRC think you have done not necessarily what you have actually done. Is it likely to trigger an investigation and how complex could this get?

The other way I could approach this is to increase my AVC's significantly and for us to live off of our savings in the interim.

There are quite often threads with similar questions to this.  According to one seasoned poster, HMRC has stated (off the record I expect) that they have never pursued an individual taxpayer for pension recycling and that the purpose of the rules is to prevent marketed recycling schemes by commercial organizations.

I am in my last year or two before retirement and I am doing things that theoretically might breach those recycling guidelines if HMRC tried to claim that I used my savings to subsidize making higher contributions.

If you want to be extra safe, your idea to drip feed the contributions rather than paying a lump sum - a large lump sum paid in is more likely to attract attention, although as said above I would not expect it to be an issue.  I am making sure that all my contributions go through my employer scheme and I will not be paying any large lump sums into the pension. 

In any case the theoretical burden of proof is on HMRC to prove that you intended to recycle the money and it was pre-planned before you made any decisions and I suspect it would be pretty hard for them to prove.

NedS

Pat38493 said:

In any case the theoretical burden of proof is on HMRC to prove that you intended to recycle the money and it was pre-planned before you made any decisions and I suspect it would be pretty hard for them to prove.

The trouble with that is they only need to reasonably satisfy themselves when making that decision, and if you do not agree with the decision, you need to take HMRC to tribunal. Such decisions are usually made under the balance of probability - they consider it is more likely than not that you knew what you were doing, therefore it was pre-planned.

Obviously where a firm is offering advice or a scheme to recycle, it fits anyone's reasonable definition of pre-planned, but individual cases are far less clear cut.

Pat38493

NedS said:

Pat38493 said:

In any case the theoretical burden of proof is on HMRC to prove that you intended to recycle the money and it was pre-planned before you made any decisions and I suspect it would be pretty hard for them to prove.

The trouble with that is they only need to reasonably satisfy themselves when making that decision, and if you do not agree with the decision, you need to take HMRC to tribunal. Such decisions are usually made under the balance of probability - they consider it is more likely than not that you knew what you were doing, therefore it was pre-planned.

Obviously where a firm is offering advice or a scheme to recycle, it fits anyone's reasonable definition of pre-planned, but individual cases are far less clear cut.

Maybe - but according to another recent thread there has never been an individual case as HMRC has never levied a penalty on an individual.  However I doubt you would be able to prove that definitively.

As said in the first reply, there are plenty of people doing very similar things like this and none of them came back here saying that they had been penalized up to now.

NedS

Pat38493 said:

NedS said:

Pat38493 said:

In any case the theoretical burden of proof is on HMRC to prove that you intended to recycle the money and it was pre-planned before you made any decisions and I suspect it would be pretty hard for them to prove.

The trouble with that is they only need to reasonably satisfy themselves when making that decision, and if you do not agree with the decision, you need to take HMRC to tribunal. Such decisions are usually made under the balance of probability - they consider it is more likely than not that you knew what you were doing, therefore it was pre-planned.

Obviously where a firm is offering advice or a scheme to recycle, it fits anyone's reasonable definition of pre-planned, but individual cases are far less clear cut.

Maybe - but according to another recent thread there has never been an individual case as HMRC has never levied a penalty on an individual.  However I doubt you would be able to prove that definitively.

As said in the first reply, there are plenty of people doing very similar things like this and none of them came back here saying that they had been penalized up to now.

Agreed