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PCLS Recycling

I took a £90k PCLS from my SIPP in October, before the budget. My wife and I gifted £50k each to our two children (£50k of which was from my PCLS) and I deposited £20k into my ISA and £20k into my wife's ISA.

I took the PCLS because I was worried about changes to the pension rules in the budget.

My total taxable income for 2024/5 will be around £200k. Ideally, I'd like to get that down to just under £100k by paying into both employer's pension and my SIPP. I have sufficient unused pension allowances from the last 3 years to do this.

Prior to taking the £90k PCLS in October, I'd already deposited £34k into my SIPP and my employer had paid £14k into my company pension (mixture of their contribution and salary sacrifice). Therefore I'd already contributed over 30% of the PCLS through employer pension and my SIPP.

Another £14k is scheduled to go into the company pension this tax year, plus a one-off £22k (sacrifice of annual bonus).

What I need to decide is how much to deposit into my SIPP over the remainder of this tax year. Obviously, if I'm convinced HMRC will claim I've already fallen foul of the recycling rules then I won't bother. The most I could realistically deposit is £40k.

I've read up about this generally and there are some excellent posts on this forum. Seems to me that HMRC would need to prove pre-planning and there was none; I always intended to try to reduce my taxable income below £100k via pension contributions in order to save tax.

Should HMRC accuse me of recycling, one issue is that I can't really prove much of a pattern because I have only had this job since mid-2023 and was on nothing like the income previously. Last tax year about £30k went into employer pension, nothing into SIPP. On the other hand, I made the same percentage salary sacrifice and also paid in my bonus to my employer's pension so there is pattern there. I ended up with a taxable income of £91k so there was no need to make deposits to my SIPP.

So should I go ahead and deposit up to £40k to my SIPP from now till end of tax year or pay a load more tax out of fear of falling foul of the recycling rules?

Comments

  • Marcon
    Marcon Posts: 12,902 Forumite
    Eighth Anniversary 10,000 Posts Name Dropper Combo Breaker
    I took a £90k PCLS from my SIPP in October, before the budget. My wife and I gifted £50k each to our two children (£50k of which was from my PCLS) and I deposited £20k into my ISA and £20k into my wife's ISA.

    I took the PCLS because I was worried about changes to the pension rules in the budget.

    My total taxable income for 2024/5 will be around £200k. Ideally, I'd like to get that down to just under £100k by paying into both employer's pension and my SIPP. I have sufficient unused pension allowances from the last 3 years to do this.

    Prior to taking the £90k PCLS in October, I'd already deposited £34k into my SIPP and my employer had paid £14k into my company pension (mixture of their contribution and salary sacrifice). Therefore I'd already contributed over 30% of the PCLS through employer pension and my SIPP.

    Another £14k is scheduled to go into the company pension this tax year, plus a one-off £22k (sacrifice of annual bonus).

    What I need to decide is how much to deposit into my SIPP over the remainder of this tax year. Obviously, if I'm convinced HMRC will claim I've already fallen foul of the recycling rules then I won't bother. The most I could realistically deposit is £40k.

    I've read up about this generally and there are some excellent posts on this forum. Seems to me that HMRC would need to prove pre-planning and there was none; I always intended to try to reduce my taxable income below £100k via pension contributions in order to save tax.

    Should HMRC accuse me of recycling, one issue is that I can't really prove much of a pattern because I have only had this job since mid-2023 and was on nothing like the income previously. Last tax year about £30k went into employer pension, nothing into SIPP. On the other hand, I made the same percentage salary sacrifice and also paid in my bonus to my employer's pension so there is pattern there. I ended up with a taxable income of £91k so there was no need to make deposits to my SIPP.


    If you've been reading other posts on this forum, you'll be aware that the answer is generally along the lines of 'nobody knows for sure' - not the most helpful! The usual 'get independent financial advice' doesn't work in this scenario for just that reason. Based on what you've said, no competent adviser is going to give you an unqualified green light.

    The key point is the pre-planning to get a second dollop of tax relief. If you can demonstrate that this wasn't the case - and the onus is on HMRC to prove it was - all should be set fair. Given your level of earnings, HMRC might have more scope for a successful challenge than would otherwise be the case, particularly in relation to the ISA top-ups and the fact that you say 'you and your wife' gifted £50K each to your children, as opposed to using the whole amount of your tax-free withdrawal to do this. They could well argue that it's not exactly a compelling argument. Whether they would succeed is quite another matter.



    So should I go ahead and deposit up to £40k to my SIPP from now till end of tax year or pay a load more tax out of fear of falling foul of the recycling rules?
    Nobody here can give you a definitive answer, although I expect some will try. Just remember that you have no recourse if you rely/act on opinions on a forum like this. 




    Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!  
  • Pat38493
    Pat38493 Posts: 3,121 Forumite
    Tenth Anniversary 1,000 Posts Name Dropper Combo Breaker
    Although nobody can be 100% sure, if the purpose of doing this is to avoid 60% marginal rate of tax, I wouldn’t worry about it too much.

    This would also imply, that you could afford to make those SIPP contributions even if you had not taken the PCLS, which again is in your favour.

    The test for 30% of the PCLS amount is for the extra contributions you made beyond what would otherwise have been expected, rather than the total, so the real question is how much you would have put into the pension if you had not taken the PCLS?

    If you are just doing what you would have done anyway, you are totally safe.  Also putting bonuses into your pension is quoted as acceptable in one of the examples in the HMRC guidelines.
  • Albermarle
    Albermarle Posts: 25,884 Forumite
    10,000 Posts Sixth Anniversary Name Dropper
    I've read up about this generally and there are some excellent posts on this forum.
    I took the PCLS because I was worried about changes to the pension rules in the budget.

    It is a bit late now, but pre budget there were a lot of threads/posts on the forum advising not to act on media speculation, especially when it came from anti Govt sources, trying to score political points.


  • sackofspuds
    sackofspuds Posts: 9 Forumite
    Part of the Furniture First Post Combo Breaker
    Thanks to all who responded. Very much appreciated.

    The PCLS has not changed what I intended to do from the outset which was to try to get my income below £100k. I appreciate this is a nice problem to have.

    The rumours before the budget was that the PCLS might be limited to £100k. I withdrew £90k because I could shelter £40k of it from tax and gift the rest. In other words, the budget made me think about it. If the budget had spooked me completely I would have taken more.

    For the sake of completeness, over half my income will come from shares given to me by my employer every quarter (RSUs) which I am able to sell immediately. I don't see 60% of these shares because my employer sells them in order to cover tax. Since the share price changes, the value varies. Depositing the net proceeds of these shares into my SIPP is the most I am willing and able to do. I decided a while ago that if that's not enough to get me below £100k then so be it.

    I could stop contributing to my SIPP now and wait till next tax year but the flip side to my job being very well paid is that it is very insecure so I may have been let go by the end of the 2025/6 tax year. Besides which, these recycling rules cover several years.
  • Pat38493
    Pat38493 Posts: 3,121 Forumite
    Tenth Anniversary 1,000 Posts Name Dropper Combo Breaker
    Thanks to all who responded. Very much appreciated.

    The PCLS has not changed what I intended to do from the outset which was to try to get my income below £100k. I appreciate this is a nice problem to have.

    The rumours before the budget was that the PCLS might be limited to £100k. I withdrew £90k because I could shelter £40k of it from tax and gift the rest. In other words, the budget made me think about it. If the budget had spooked me completely I would have taken more.

    For the sake of completeness, over half my income will come from shares given to me by my employer every quarter (RSUs) which I am able to sell immediately. I don't see 60% of these shares because my employer sells them in order to cover tax. Since the share price changes, the value varies. Depositing the net proceeds of these shares into my SIPP is the most I am willing and able to do. I decided a while ago that if that's not enough to get me below £100k then so be it.

    I could stop contributing to my SIPP now and wait till next tax year but the flip side to my job being very well paid is that it is very insecure so I may have been let go by the end of the 2025/6 tax year. Besides which, these recycling rules cover several years.
    This tends to reinforce my prior comment.  My opinion (I am not an adviser or such this is just a private opinion) is that your pension contritutions in this tax year will not exceed "what would otherwise have been expected" by more than 30% - in fact they will exceed it by 0% as you are saying you would have done the same either way.

    As such, in my view this is not recycling, and if it was me I would go ahead.  I am actually doing arguably worse than this as I am contributing more to my pension than would otherwise have been expected if you adjust for me recently going part time at work (which HMRC never covers in any of their examples), but the excess amount is less than 30% of the smallest lump sum taken so I am still assuming I am ok.

    The other point is that there has never yet been a court case where someone challenged HMRC about their decision on this, so there is no legal precedent about what constitutes "what would otherwise have been expected", and we only have vague and partially ambiguous HMRC guidelines.  Further, when the legislation was first introduced, it was stated in parliament that this law will only be used against organised commercial recycling schemes, and not against individual taxpayers who are managing their own affairs (keeping in mind that comments made in parliament, even by the minister who was at the time responsible for this matter, are not legally binding).

    For what it's worth, it seems that nobody has ever come to this forum or other pension forums frequented by members, stating that they have been penalised by HMRC under this legislation (although this doesn't mean it hasn't happened).
  • westv
    westv Posts: 6,318 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    Pat38493 said:
    Thanks to all who responded. Very much appreciated.

    The PCLS has not changed what I intended to do from the outset which was to try to get my income below £100k. I appreciate this is a nice problem to have.

    The rumours before the budget was that the PCLS might be limited to £100k. I withdrew £90k because I could shelter £40k of it from tax and gift the rest. In other words, the budget made me think about it. If the budget had spooked me completely I would have taken more.

    For the sake of completeness, over half my income will come from shares given to me by my employer every quarter (RSUs) which I am able to sell immediately. I don't see 60% of these shares because my employer sells them in order to cover tax. Since the share price changes, the value varies. Depositing the net proceeds of these shares into my SIPP is the most I am willing and able to do. I decided a while ago that if that's not enough to get me below £100k then so be it.

    I could stop contributing to my SIPP now and wait till next tax year but the flip side to my job being very well paid is that it is very insecure so I may have been let go by the end of the 2025/6 tax year. Besides which, these recycling rules cover several years.


    For what it's worth, it seems that nobody has ever come to this forum or other pension forums frequented by members, stating that they have been penalised by HMRC under this legislation (although this doesn't mean it hasn't happened).
    If it was any sort of issue, I would imagine the personal finance media would be all over it.
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