The pension recycling rules: the £7,500 trigger and the 30% test

Tax-free cash is meant to leave the pension system. Take a pension commencement lump sum and — as part of a pre-planned arrangement — pay significantly more back into a pension, and the recycling rule (FA 2004 Sch 29 para 3A; PTM133800) re-characterises the lump sum as an unauthorised member payment. The design target is the circular trade: relieved money out tax-free, back in with fresh relief and a fresh future tax-free entitlement. The rule is a conjunction of six conditions, and the consequence when all six hold is severe: the whole lump sum is charged at 40%, with a further 15% surcharge in some cases.

The six conditions — every one must be met

PTM133810 sets out the conditions, and they must all hold. First, the individual receives a pension commencement lump sum. Second, because of the lump sum, the contributions paid into a registered pension scheme in respect of the individual are significantly greater than they otherwise would be. Third, the additional contributions are made by the individual or by someone else — an employer’s contributions count just as the member’s own do. Fourth, the lump sum, taken together with any other such lump sums in the previous 12 months, exceeds £7,500 (for events on or after 6 April 2015). Fifth, the cumulative additional contributions exceed 30% of the lump sum. Sixth, the recycling was pre-planned. Fail any single limb and the lump sum stays an ordinary authorised payment — the rule has no partial application.

PTM133810 ; FA 2004 Sch 29 para 3A.

Gate one: the £7,500 cumulative trigger

The £7,500 test is cumulative over a rolling window: this lump sum plus all other pension commencement lump sums taken in the previous 12 months. That aggregation is the trap. Three modest lump sums of £3,000, £3,000 and £4,000 inside twelve months sum to £10,000 — over the line, even though no single payment comes near £7,500. The word in the manual is “exceeds”: cumulative tax-free cash of exactly £7,500 does not trigger the rule, £7,500.01 does. Below the trigger the safe harbour is absolute — however large the contributions that follow, recycling cannot apply where the 12-month cumulative tax-free cash is £7,500 or less.

Gate two: the 30% test

The second arithmetic gate measures the contribution response. The cumulative additional contributions must exceed 30% of the tax-free cash, and PTM133830 gives the same proportion a second job: HMRC accepts that a “significant increase” in contributions has not occurred at all unless the additional contributions exceed 30% of the contributions that would otherwise have been expected. The window for counting them is wide — the tax year of the lump sum plus the two tax years before and the two after, five tax years in all — so contributions made well before the cash is taken, or some time after, still count. On the aggregated example above: 30% of the £10,000 cumulative tax-free cash is £3,000, so £4,000 of additional contributions trips the gate. Both gates are pure arithmetic, and the pension recycling checker computes them to the penny from the same figures.

PTM133830 (the 30% measure and the five-tax-year window) ; Appendix D of the engine corpus (ADR-048).

The limb no calculator can decide: pre-planning

The sixth condition is not arithmetic. Whether the recycling was pre-planned is a question of fact about the member’s intention at or before the time the lump sum was paid, weighed on the evidence — and PTM133820 places the onus on HMRC to show it. A calculator can state whether the two gates are tripped; it cannot know what was in the member’s mind, and this one does not pretend to. Where both gates trip, pre-planning is the live question, and it belongs to the adviser’s file — the contemporaneous record of why the contribution was made is what the limb turns on.

PTM133820.

The consequence: the whole lump sum, not 30% of it

When all six conditions hold, the amount treated as an unauthorised payment is the entire pension commencement lump sum — not the excess over £7,500, not the recycled portion, and not 30% of anything (PTM133840). Confusing the 30% test with the charged amount is the classic DIY error. The unauthorised payments charge is 40% of the lump sum, and a 15% unauthorised payments surcharge applies on top where unauthorised payments reach 25% of the member’s pension rights (PTM134100; FA 2004 ss.208–209):

Fifty-five per cent of the “tax-free” cash, gone — and the scheme administrator faces a separate scheme sanction charge of its own. How much tax-free cash was available in the first place is a different question, bounded by the £268,275 lump sum allowance; the Lump Sum Allowance calculator tests that, and tax on a pension lump sum covers the ordinary treatment when the rule is not in play.

PTM133840 ; PTM134100 ; FA 2004 ss.208–209.

What does not trip the rule

The rule is narrower than its reputation. Cumulative tax-free cash of £7,500 or less in the rolling 12 months cannot trigger it, whatever the contributions. Contribution increases at or below the 30% line do not meet the significant-increase condition. Contributions that were genuinely not pre-planned — where no arrangement to recycle existed when the lump sum was taken, and the evidence shows it — fail the sixth limb, and the onus of showing pre-planning sits with HMRC, not the member (PTM133820). Note also what the rule polices: the tax-free 25%. Contributions after taking taxable flexible income are the province of a different mechanism entirely — the money purchase annual allowance — and the two operate independently: a withdrawal can engage both, either, or neither.

PTM133810–PTM133820 ; PTM056500 (the MPAA, a separate mechanism).