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; PTM133810) 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 being tested. 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 lump sum being tested — that single pension commencement lump sum, not the 12-month total used for the £7,500 trigger (FA 2004 Sch 29 para 3A(4); PTM133850 Example 2). That is a separate bar from whether the increase is “significant” at all, which PTM133830 measures against 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, the £4,000 lump sum is tested on its own: 30% of £4,000 is £1,200, so £4,000 of additional contributions trips the gate. If all six conditions hold, the unauthorised payment is that £4,000 lump sum — a £1,600 charge, plus £600 where the surcharge applies — not the £10,000 aggregate. Both gates are pure arithmetic, and the pension recycling checker computes them from the same figures.

FA 2004 Sch 29 para 3A(4) (the 30% bar) ; PTM133850 Example 2 ; PTM133830 (significant increase and the five-tax-year window).

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. Additional contributions of 30% or less of the lump sum being tested fall outside the rule (para 3A(4)) — a separate bar from whether the increase is significant against the contributions that would otherwise have been expected (PTM133830). Nor does it apply where the member has reached 75 when the contributions are paid and none of them is paid by an employer (FA 2004 Sch 29 para 3A(4A); PTM133810). 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–PTM133830 ; FA 2004 Sch 29 para 3A(4), (4A) ; PTM056510 (the MPAA, a separate mechanism).