- Tax-free cash (TFC) recycling is defined by four criteria
- You must meet all four criteria to be caught by recycling rules
- If recycling applies, any TFC paid is an unauthorised payment
Key takeaways from this article
1. What is TFC recycling?
TFC is known under legislation as a pension commencement lump sum (PCLS). Recycling is where the sole purpose of taking a PCLS, is to increase contributions into a pension.
HMRC says “The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax-relieved, contribution to a registered pension scheme.”
Where recycling takes place any PCLS paid out will be classed as an unauthorised payment and an unauthorised payments charge will be due.
2. Criteria
To be classed as recycling four criteria must be met. Anything less is not recycling. The criteria are:
- A PCLS of £7,500 or more is taken
- Additional contributions over a 5-year period are more than 30% of the PCLS taken
- Additional contributions over a 5-year period are more than 30% than what would normally be contributed
- The recycling was pre-planned – taking a PCLS was planned to enable increased contributions.
3. Timing
It does not matter who pays the contributions or whether the contributions are made before or after the PCLS is taken.
The 5-year period where contributions are assessed consists of:
- Two tax years before the PCLS is taken
- The tax year the PCLS is taken
- Two tax years after the PCLS is taken.
4. Assess whether recycling has taken place
Step One
Is the PCLS £7,500 or more?
- If no, this is not recycling.
- If yes, go to Step Two.
Step Two
Are the additional contributions over the 5-year period more than 30% of the PCLS take?
- If no, this is not recycling.
- If yes, go to Step Three.
Step Three
Are the additional contributions over the 5-year period more than 30% than what would normally be contributed?
- If no, this is not recycling.
- If yes, go to Step Four.
Step Four
Was the PCLS taken as part of a plan to enable increased contributions either before or after the PCLS was taken?
- If no, this is not recycling.
- If yes, this is recycling.
5. Further information
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The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.