This guide is for financial advisers only. It must not be distributed to, or relied on by, customers. The information on this page is based on our understanding of legislation as at May 2023.

If the tax-free cash recycling rule didn’t exist, tax-free cash could be taken from a registered pension scheme and be re-invested back into a registered pension scheme by paying it as a contribution. Tax relief would be available on contributions of up to 100% of the member’s relevant UK earnings (or £3,600, if this is more).  As well as benefitting from tax-relief and tax-efficient growth, generally, the individual could either take another tax-free cash amount of up to 25% of the fund (limited to 25% of their remaining lifetime allowance) and use the rest to provide an income (subject to tax at their marginal rate).

The tax-free cash recycling rule is designed to prevent individuals from manipulating the tax rules for registered pension schemes in order to obtain significantly higher amounts of tax relief by using tax-free cash to make further tax-relieved contributions. If tax-free cash recycling is deemed to have taken place, the original payment of tax-free cash is treated as an unauthorised payment and the appropriate tax charges will apply. This section gives further information on this.

The following conditions all need to be present, for tax-free recycling to have taken place:

  1. The recycling is ‘pre-planned’.
  2. The tax-free cash taken, either alone or in aggregate with other tax-free cash amounts taken in the previous 12 months, is more than £7,500.
  3. There is a ‘significant increase’ in the level of expected pension contributions (personal, employer and/or third-party contributions) to any one or more registered pension schemes because of the tax-free cash taken, or to be taken. To meet this condition, both of the following must apply:
    • There is an increase in contributions of more than 30% of the contributions that might otherwise have been expected, based on a number of factors, such as contribution history and current contractual rate of contributions, and
    • the increase in contributions is more than 30% of the tax-free cash lump sum that the member took (or is due to take)

If all these conditions are met, the tax-free cash amount is classed as an unauthorised payment by HM Revenue and Customs (HMRC) and will be taxed accordingly.

Pre-planning is where the individual makes a conscious decision to take the tax-free cash in order to allow significantly increased contributions, whether directly or indirectly, to be paid to a registered pension scheme by or for them. 

Pre-planning must take place at a ‘relevant time’ as described by HMRC. Where the tax-free cash is taken before contributions are significantly increased, the ‘relevant time’ is when the tax-free cash is taken. But where the significant increase in the level of expected contributions are made before the tax-free cash is taken then the ‘relevant time’ is when the increase to the contributions takes place. 

Where an individual takes tax-free cash and only later decides to use it to pay higher contributions, the onus will not be on the individual to prove the absence of intent to recycle. HMRC can, however, consider any evidence that points towards pre-planning.

The significant increase test is carried out on a cumulative basis to prevent someone avoiding the rule by increasing contributions on a piecemeal basis, or gradually over time. 

The period over which the measurement to determine whether a significant increase will take place is:

  • the tax year in which the tax-free cash is taken with an intention to use it to significantly increase contributions, and
  • the two immediately preceding and two immediately following tax years (so where the tax-free cash is taken in 2023/24, the two preceding tax years would be 2021/22 and 2022/23 and the two following tax years would be 2024/25 and 2025/26)

This gives a five-year testing period. 

Any personal contributions (including third party contributions but excluding employer contributions) which are paid on or after age 75 are excluded from this test. This is because personal contributions do not attract tax relief and therefore the member will not benefit from double tax-relief if recycling occurs. 

Where the member hadn’t paid contributions in a while, the Retail Price Index (RPI) can be used to up-rate the last contribution to produce a current value for comparison purposes. Contributions that are paid within the five-year testing period should not be uprated.

Where tax-free cash is paid in a series of payments, it’s the payment that takes the total amount paid in the last 12 months over £7,500 that is used for the significant increase in contributions calculation. For example:

1 January 2023 – the first payment of tax-free cash amounting to £3,000 is taken. There is no recycling issue as the total tax-free cash in last 12 months is less than £7,500. 

22 March 2023 – a further tax-free cash payment of £5,000 is taken.

The total tax-free cash taken in the last 12 months is £8,000. The tax-free cash payment of £5,000 is used when checking if the additional contribution exceeds 30% of the tax-free lump sum paid. If the additional contribution were £2,000, this would be deemed to be a significant increase as it’s more than 30% of £5,000.

There is no definitive list of situations that will be caught by the recycling rules, but the following are some examples of situations that will be caught:

  • Paying the tax-free cash as a contribution (where the recycling conditions are all met)
  • Borrowing to facilitate recycling (where it is intended to repay the loan with the tax-free cash)
  • Employer contribution facilitating recycling (usually where the individual can control the level of employer contributions)

The following are some examples of situations where the recycling rules might not apply:

  • The member receives an inheritance soon after taking the tax-free cash, and because of the inheritance they make a one-off contribution.
  • Contributions are based on profits from self-employment.
  • The member benefits from a genuine windfall and takes tax-free cash. The payment of tax-free cash was underway before the win, to clear debts. When the windfall is received, the member pays a contribution to a registered pension scheme.
  • The employer buys an immediate annuity for an employee whose employment had been non-pensionable, and the employee takes a tax-free cash sum from a scheme they had been privately funding.
  • The ‘tax-free cash’ does not arise from a pension commencement lump sum. The recycling rules only apply to pension commencement lump sums. The rules don't apply to other lump sums such as small pot payments or uncrystallised funds pension lump sums where part of the lump sum is paid tax free. You can read more about these payments in our Taking Benefits Guide.

A member who takes a tax-free cash sum with the intention of recycling it will have to tell the scheme administrator about the recycling within 30 days of the date of the deemed unauthorised payment. 

Where the member fails to tell the scheme administrator within the required 30 days, the member could be liable for a penalty of up to £300. Subsequent penalties of up to £60 a day could become payable for as long as the member doesn’t inform the scheme administrator. 

The member should also declare the unauthorised payment on their self-assessment tax return.

The whole tax-free cash amount (not just the amount that is deemed to have been paid in additional contributions) is an unauthorised member payment. 

The unauthorised member payment is deemed to occur when all the conditions for the recycling rule to apply are met. This date will determine the tax year of assessment in which the charge arises.

Where the significant increase in the contributions happens first, it will be the date of the payment of the tax-free cash that is the deemed occurrence date. 

Where the tax-free cash is taken before the significant increase in contributions happens it will be the date that those significantly increased contributions are made that is the deemed occurrence date. 

Member tax charges:

The member will be liable for:

An unauthorised payment charge of 40% of the tax-free cash amount

A possible further 15% surcharge where the unauthorised payment, either alone or in aggregate with any other unauthorised payment to, or in respect of the member from that registered pension scheme over a 12 month period, is 25% or more of the member’s total rights under the scheme.

As it is common for the tax-free cash element of the member’s total rights under the schemeto be taken at the 25% level, if tax-free cash recycling is deemed to have occurred, the surcharge is likely to apply in most cases. 

Scheme administrator charges:

The scheme administrator will be liable for a scheme sanction charge of between 15% and 40% of the tax-free cash amount (dependent on the amount of charge actually paid by the member).

The scheme administrator can, where it considers that it has just and reasonable grounds to do so, ask HMRC to discharge its scheme sanction charge liability. Such a request can be made, for example, where a member triggers the recycling rule despite having previously told the scheme administrator that they had no intention of doing so.

It is possible for the scheme administrator to ask the member to declare before taking tax-free cash if they are taking it with the intention of significantly increasing pension contributions.  However, the scheme administrator isn’t required to do this.

The recycling rules are not limited to individuals in a registered pension scheme who are UK resident. The rules also apply to non-UK residents in a UK registered pension scheme. 

They could also apply where:

  • An individual takes tax-free cash from a registered pension scheme then recycles it into an overseas pension scheme where UK tax relief is available on contributions as if the overseas pension scheme were a registered pension scheme, or
  • An individual benefiting from migrant member relief (i.e. an individual who has come to the UK and received UK tax relief on contributions to their existing overseas scheme, subject to conditions) recycles a tax-free cash payment from an overseas pension scheme into that same scheme or to a UK registered pension scheme

HMRC guidance on recycling can be found at: