Blog
A deep-dive into a variety of pension topics to help you understand and learn more about your pension and the Scheme.
10/11/2025
Editorial
<p>Pension recycling refers to the practice of taking tax-free cash (usually 25% of a pension pot) and reinvesting it back into a pension scheme to gain further tax relief. </p><p>While this might seem like savvy financial planning, HMRC has strict rules to prevent abuse of the pension tax relief system.</p><h5>What are the rules?</h5><p>HMRC’s pension recycling rules are designed to prevent individuals from exploiting tax relief by using their tax-free lump sum to make significantly increased pension contributions. </p><p>If HMRC determines that an individual has used their tax-free cash in this way, they may treat the payment as ‘unauthorised’. This could result in a tax charge of up to 70% of the value of your tax-free cash.</p><p>HMRC considers a lump sum paid to be unauthorised if all of the following conditions are met:</p><ol><li>The individual received a tax-free lump sum from one or more pension schemes</li><li>Their pension contributions increase significantly as a result</li><li>The lump sum (plus any others taken in the previous 12 months) exceeds £7,500<strong></strong></li><li>The increase in contributions over a 5-year period is more than 30% of the lump sum taken<strong></strong></li><li>The recycling was pre-planned - i.e. the individual intended to use the lump sum to fund increased contributions. Even if the contributions were made before the lump sum was taken, HMRC may still consider it pre-planned.<strong></strong></li></ol><p><strong> </strong></p><h5>The 5-year testing period</h5><p>HMRC examines contributions made in:</p><ul type="disc"><li>The tax year the lump sum was taken</li><li>2 years before</li><li>2 years after</li></ul><p>This 5-year window helps determine whether the increase in contributions was significant and linked to the lump sum. </p><p> </p><h5>Tax penalties for breaching the rules</h5><p>If caught by the recycling rules, the tax-free cash is treated as an unauthorised payment, which may trigger serious financial implications </p><p> </p><h5>When pension recycling doesn’t apply</h5><p>Recycling does not apply if:</p><ul type="disc"><li>The lump sum is under £7,500.</li><li>Contributions increase due to salary, bonus, or commission (without changing the contribution basis).</li><li>The increase is funded by unrelated sources like inheritance or redundancy.</li><li>The contributions are made to someone else's pension (e.g., spouse or child). <strong></strong></li></ul><p><strong> </strong></p><h5>Find out more</h5><p>More information on pension recycling is available in <a href="https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810" target="_blank" data-sf-ec-immutable="" data-sf-marked="">the Pension Tax Manual on the government’s website</a>. The manual provides the legal framework for pension recycling.<span style="background-color: rgba(0, 0, 0, 0); color: inherit; font-family: inherit; font-size: inherit; text-align: inherit; text-transform: inherit; word-spacing: normal; caret-color: auto; white-space: inherit"></span></p>
<p>Pension recycling refers to the practice of taking tax-free cash (usually 25% of a pension pot) and reinvesting it back into a pension scheme to gain further tax relief. </p><p>While this might seem like savvy financial planning, HMRC has strict rules to prevent abuse of the pension tax relief system.</p><h5>What are the rules?</h5><p>HMRC’s pension recycling rules are designed to prevent individuals from exploiting tax relief by using their tax-free lump sum to make significantly increased pension contributions. </p><p>If HMRC determines that an individual has used their tax-free cash in this way, they may treat the payment as ‘unauthorised’. This could result in a tax charge of up to 70% of the value of your tax-free cash.</p><p>HMRC considers a lump sum paid to be unauthorised if all of the following conditions are met:</p><ol><li>The individual received a tax-free lump sum from one or more pension schemes</li><li>Their pension contributions increase significantly as a result</li><li>The lump sum (plus any others taken in the previous 12 months) exceeds £7,500<strong></strong></li><li>The increase in contributions over a 5-year period is more than 30% of the lump sum taken<strong></strong></li><li>The recycling was pre-planned - i.e. the individual intended to use the lump sum to fund increased contributions. Even if the contributions were made before the lump sum was taken, HMRC may still consider it pre-planned.<strong></strong></li></ol><p><strong> </strong></p><h5>The 5-year testing period</h5><p>HMRC examines contributions made in:</p><ul type="disc"><li>The tax year the lump sum was taken</li><li>2 years before</li><li>2 years after</li></ul><p>This 5-year window helps determine whether the increase in contributions was significant and linked to the lump sum. </p><p> </p><h5>Tax penalties for breaching the rules</h5><p>If caught by the recycling rules, the tax-free cash is treated as an unauthorised payment, which may trigger serious financial implications </p><p> </p><h5>When pension recycling doesn’t apply</h5><p>Recycling does not apply if:</p><ul type="disc"><li>The lump sum is under £7,500.</li><li>Contributions increase due to salary, bonus, or commission (without changing the contribution basis).</li><li>The increase is funded by unrelated sources like inheritance or redundancy.</li><li>The contributions are made to someone else's pension (e.g., spouse or child). <strong></strong></li></ul><p><strong> </strong></p><h5>Find out more</h5><p>More information on pension recycling is available in <a href="https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810" target="_blank" data-sf-ec-immutable="" data-sf-marked="">the Pension Tax Manual on the government’s website</a>. The manual provides the legal framework for pension recycling.<span style="background-color: rgba(0, 0, 0, 0); color: inherit; font-family: inherit; font-size: inherit; text-align: inherit; text-transform: inherit; word-spacing: normal; caret-color: auto; white-space: inherit"></span></p>
Blog
What is 'pension recycling'?
Here’s a short overview of the rules around it.
Pension recycling refers to the practice of taking tax-free cash (usually 25% of a pension pot) and reinvesting it back into a pension scheme to gain further tax relief.
While this might seem like savvy financial planning, HMRC has strict rules to prevent abuse of the pension tax relief system.
What are the rules?
HMRC’s pension recycling rules are designed to prevent individuals from exploiting tax relief by using their tax-free lump sum to make significantly increased pension contributions.
If HMRC determines that an individual has used their tax-free cash in this way, they may treat the payment as ‘unauthorised’. This could result in a tax charge of up to 70% of the value of your tax-free cash.
HMRC considers a lump sum paid to be unauthorised if all of the following conditions are met:
- The individual received a tax-free lump sum from one or more pension schemes
- Their pension contributions increase significantly as a result
- The lump sum (plus any others taken in the previous 12 months) exceeds £7,500
- The increase in contributions over a 5-year period is more than 30% of the lump sum taken
- The recycling was pre-planned - i.e. the individual intended to use the lump sum to fund increased contributions. Even if the contributions were made before the lump sum was taken, HMRC may still consider it pre-planned.
The 5-year testing period
HMRC examines contributions made in:
- The tax year the lump sum was taken
- 2 years before
- 2 years after
This 5-year window helps determine whether the increase in contributions was significant and linked to the lump sum.
Tax penalties for breaching the rules
If caught by the recycling rules, the tax-free cash is treated as an unauthorised payment, which may trigger serious financial implications
When pension recycling doesn’t apply
Recycling does not apply if:
- The lump sum is under £7,500.
- Contributions increase due to salary, bonus, or commission (without changing the contribution basis).
- The increase is funded by unrelated sources like inheritance or redundancy.
- The contributions are made to someone else's pension (e.g., spouse or child).
Find out more
More information on pension recycling is available in the Pension Tax Manual on the government’s website. The manual provides the legal framework for pension recycling.
