Pensions Recycling Print

Recycling is where an individual boosts their pension savings by taking a tax-free cash lump sum and as a result increases payments into one or more pension plans to gain more tax relief. One of the benefits to the individual of recycling is that it allows further tax-free cash to be paid. The income that is taken from the pension plan is re-invested back into one or more pension plans. The member would continue to benefit from tax efficient growth and would have access to a further tax-free cash sum at the point they take benefits from the plan.

Whilst income payments from pension plans are treated as taxable income, this can be effectively offset by the tax relief given when the payment is re-invested into the pension plan. HMRC do not classify income from pension plans as relevant UK earnings, and therefore the individual would need to have relevant UK earnings from another source so that they are eligible for tax relief on the re-invested payments.

  • All payments of tax-free lump sums in a 12-month period need to be counted. This may include payments from more than one pension plan.
  • Is the total of all tax-free lump sum payments over the 12-month period more than £7,500? If not, then recycling is deemed not to have 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 is 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 is potentially five tax years in total. This applies to member, employer and third party contributions.

Recycling may not apply if a member’s contributions increase because they are linked to salary, bonus, overtime or commission as long as the basis on which the pension contribution is based does not change.

  • The increase in additional contributions is only significant if the total amount is more than 30% of the tax-free lump If contributions are paid to more than one pension scheme, it is the total of all contributions that need to be looked at.

If the member borrows money to pay the contributions or pays the contributions out of savings then uses the tax-free lump sum to pay off the loan or top up the savings, recycling will still be deemed to have occurred. This of course, assumes that all other conditions have been met.

  • Pre-planning – If the answer to all the above conditions is ‘yes’, then it is going to all come down to the last condition. In its simplest sense, pre-planning means that there was an intention right from the very beginning to use the tax- free cash as a way of significantly increasing pension contributions. To satisfy this condition, such pre-planning must take place at the ‘relevant time’. If a decision is made to use the tax-free lump sum to significantly increase contributions, this is pre-planning. The ‘relevant time’ is when the tax-free lump sum is Even if the contributions increase before the tax-free lump sum is taken this can be pre-planning. In this case the ‘relevant time’ is when the contributions are increased.

If a member is caught by the recycling rules, the amount of the tax-free lump sum is regarded as an unauthorised payment and any of the following charges may be applied:

  • an unauthorised member payment charge of 40% of the tax-free lump sum paid
  • an unauthorised payments surcharge of 15% of the tax-free lump sum paid
  • a scheme sanction charge of 40% of the tax-free lump sum
  • a de-registration charge of 40% of the scheme’s

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