There would then be a unauthorised payment tax charge of 40 per cent, which the client would be liable for personally. If the client crystallised their entire pension when taking the PCLS, an unauthorised payment surcharge of 15 per cent would also apply (given that the PCLS would account for 25 per cent of the whole pension scheme).
There would also be a scheme sanction charge on the pension itself of between 15 per cent and 40 per cent depending on how much of the unauthorised payment charge the client paid. However, if the scheme administrator was unaware of the client’s plans it may be able to ask HM Revenue & Customs to discharge its liability.
How does HMRC approach recycling?
While most of the above conditions are straightforward to apply, two questions come to mind:
- What constitutes a significant increase in contributions?
- What constitutes planning?
HMRC covers both of these in its published guidance.
Taking the contribution point first, HMRC uses a 30 per cent rule of thumb – be careful not to confuse this with the ‘30 per cent of PCLS’ condition. This means that HMRC are unlikely to scrutinise additional contributions unless they are 30 per cent more than what the client might otherwise have paid in.
They will also ignore increases that are outside of the client’s control, such as contractual increases, and increases that are due to natural fluctuations, and they will consider the broader context.
Example 1 Sandra runs her own business, and her income fluctuates. Historically she has contributed 10 per cent of her income each year to a personal pension. During the Covid-19 pandemic her income virtually ceased, so she took a PCLS from her personal pension to make up the shortfall. Sandra changed how her business operated and it bounced back strongly, so this year she has a much higher income than normal. She therefore makes a much higher contribution than normal but it is still at 10 per cent of her income. From a recycling perspective, this latest contribution is likely to be disregarded given it was made on the same basis as contributions in previous years and had no relation to any PCLS payment. |
When assessing increases, HMRC works on a cumulative basis and will look at contributions over a five-year period. This period includes the tax year in which the client took PCLS, the two tax years before that and the two tax years after. The purpose is to identify cases where individuals are attempting to spread the increased contribution over several years in order to avoid scrutiny.
In terms of the planning aspect, the guidance does not indicate what evidence can or cannot be taken into account. It does say that the onus is not on the individual to prove an absence of planning, it is on HMRC to demonstrate the individual had planned to increase their contributions following receipt of a PCLS.
In terms of other points to note, HMRC is clear in the guidance that recycling can involve more than just the two key transactions of lump sum and contribution. It will look beyond these, and it will take into account other transactions entered into for the purpose of recycling.
Furthermore, there is no prescribed order of transactions and no requirement that the actual PCLS funds are used to make the contribution.
