Reinvesting a pension commencement lump sum triggers the recycling rule only when the reinvestment was planned in advance, the lump sum (with any others taken in the previous 12 months) exceeds £7,500, contributions become significantly greater because of it, and the extra contributions exceed 30% of the lump sum. If every condition is met, the lump sum is treated as an unauthorised member payment taxed at 40%, possibly with a 15% surcharge, and the scheme faces a scheme sanction charge.

What is pension recycling?

A pension commencement lump sum, usually up to 25% of the benefits being taken, is normally paid tax free within the member’s lump sum allowance, which GOV.UK gives as £268,275 for most people. Recycling means using that tax free cash to pay a fresh contribution into a registered pension scheme, which then attracts tax relief on the way in. Done deliberately, the same money can generate relief twice.

The anti avoidance rule is in paragraph 3A of Schedule 29 to the Finance Act 2004. HMRC’s Pensions Tax Manual at PTM133810 describes its purpose as preventing the systematic exploitation of the pension tax rules to generate artificially high tax relief. HMRC also says that very few lump sums are affected and that lump sums taken as part of normal retirement planning will not be caught. The rule applies to lump sums paid on or after 6 April 2006, whenever the increased contributions are paid.

Which conditions must all be met?

PTM133810 lists the conditions. The rule applies only if all of them are satisfied:

  1. The individual receives a pension commencement lump sum.
  2. Because of the lump sum, contributions paid to registered pension schemes in respect of the individual are significantly greater than they otherwise would be.
  3. The additional contributions are paid by the individual or by someone else, such as an employer or a spouse.
  4. The recycling was planned in advance.
  5. The lump sum, together with any other pension commencement lump sums taken in the previous 12 months, exceeds £7,500 (for events on or after 6 April 2015).
  6. The cumulative additional contributions exceed 30% of the lump sum.

Fail any one and there is no recycling charge. In practice the arguments usually centre on whether the increase was significant, whether it was caused by the lump sum and whether it was planned.

What counts as a significant increase in contributions?

HMRC’s rule of thumb at PTM133830 is that there is no significant increase unless, because of the lump sum, the additional contributions are more than 30% of the contributions that might otherwise have been expected. The starting point is to establish what would have been paid without the lump sum, usually from the individual’s established pattern, and compare it with what was actually paid.

The test is cumulative, so increases cannot be dripped in to stay under the line. Contributions are measured over five tax years: the year the lump sum is taken, the two tax years before it and the two tax years after it. Contributions by the member, by others on the member’s behalf and by employers all count.

Where there is no recent pattern, PTM133860 shows HMRC using the Retail Prices Index to bring an old contribution up to a current value for comparison. Increases that follow the same basis as before, such as a fixed percentage of a fluctuating salary or bonus, a fixed share of self employed profits, or a scheme wide rise in member contribution rates, are not treated as significant increases caused by the lump sum.

When is recycling treated as planned in advance?

PTM133820 says the individual must have intended from the outset to use the lump sum to enable significantly greater contributions. The planning must exist at the relevant time: when the lump sum is paid if the contributions follow it, or when the contributions are made if they come first. Deciding to reinvest only after receiving the money is not recycling.

The onus is on HMRC to show planning, not on the individual to disprove it, but HMRC can rely on any evidence that points to it. Indirect routes are caught. HMRC’s examples at PTM133850 include:

  • paying the contribution from savings and then using the lump sum to replenish those savings
  • taking a short term loan to pay the contribution and repaying it with the lump sum
  • sacrificing a bonus so the employer pays it into the pension, while living on the lump sum instead; see our guide to salary sacrifice schemes

Having other money that could have funded the contribution does not avoid the rule if the lump sum was always part of the plan. Equally, the lump sum merely going into the same bank account as the savings used for the contribution does not by itself prove recycling.

What does not count as recycling?

PTM133860 gives examples that fall outside the rule:

  • moving to a new employer whose scheme requires member contributions, paid from salary in the ordinary way
  • contributions that fluctuate with pay or bonuses but are calculated on an unchanged basis
  • starting contributions of 10% of profits from a new self employment after retiring from employment, with no plan to use the lump sum
  • a windfall, such as a lottery win, inheritance or settlement, that funds a contribution after a lump sum taken for another purpose

There is also a statutory exclusion. The rule does not apply where the lump sum was paid on or after 6 April 2011, the member had reached 75 when the contributions were paid, and none of those contributions were paid by an employer (PTM133810). Simply increasing contributions in order to build a bigger lump sum later is not recycling either, provided no lump sum is used to fund the increase. The minimum age for taking the lump sum in the first place is covered in our guide to normal minimum pension age.

What tax is charged if the rule applies?

The amount of the pension commencement lump sum is treated as an unauthorised member payment (PTM133840). The deemed payment occurs when the last condition is met: usually the date the increased contributions are paid, or the date of the lump sum if the contributions came first. That date fixes the tax year of the charge.

  • Unauthorised payments charge. 40% of the payment under section 208 of the Finance Act 2004, a freestanding charge that losses cannot reduce (PTM134100).
  • Unauthorised payments surcharge. A further 15% under section 209 where unauthorised payments in a 12 month period reach 25% or more of the member’s pension rights.
  • Scheme sanction charge. Payable by the scheme administrator at 40%, reduced to no less than 15% where the unauthorised payments charge has been paid (PTM135100).

A member who takes a lump sum as part of a recycling arrangement must tell the scheme administrator within 30 days of the deemed unauthorised payment, under regulation 11A of the Registered Pension Schemes (Provision of Information) Regulations 2006. An administrator who reasonably believed the payment was not chargeable, for example because the member signed a declaration that the lump sum would not be reinvested, can apply to HMRC to be discharged from the scheme sanction charge (PTM133840). The member reports the charges through Self Assessment.

A worked example

Illustration only. Graham has paid £10,000 a year into his personal pension for many years. He takes a pension commencement lump sum of £40,000, intending from the start to use it to boost his contributions, and in the same tax year pays £25,000 in total.

  • The lump sum exceeds £7,500.
  • Expected contributions were £10,000, so the additional £15,000 is well over 30% of what was expected (£3,000): a significant increase.
  • The additional £15,000 exceeds 30% of the lump sum (£12,000).

With the planning established, the whole £40,000 is a deemed unauthorised payment and the unauthorised payments charge is £16,000, before any surcharge or scheme sanction charge. If Graham had paid only £20,000 in total, the additional £10,000 would not exceed £12,000, so the rule would not be triggered even though the increase was significant, provided no further increases followed within the five year window.

What mistakes come up most often?

  • Assuming that paying the contribution from savings rather than the lump sum itself avoids the rule.
  • Spreading the increase over several years without realising it is measured cumulatively across five tax years.
  • Overlooking employer contributions and salary or bonus sacrifice, which count as additional contributions.
  • Taking two smaller lump sums within 12 months; they are added together for the £7,500 test.
  • Planning the reinvestment in emails or adviser notes, then relying on the absence of planning.
  • Not telling the scheme administrator within 30 days when recycling has happened.

Owner managers drawing tax free cash while their company continues to pay contributions should check the pattern of employer payments carefully; the general rules on relief are in our guide to pension contributions for business owners. Errors in a return that omits the charge can attract penalties for inaccuracies.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.