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Question: I’m planning on withdrawing about £28,000 from my SIPP around January 2026 but don’t want to fall foul of HMRC’s tax recycling rules with my pension contributions during this tax year. I think I get the idea of not increasing my cumulative contributions (triggering tax relief) “significantly” (30 per cent more than would be expected) over five years (so in my case from 2023/24 to 2027/28). But what I’m not sure about is exactly which year’s past contributions are considered to be “expected”.
Answer: Pensions are an extremely tax-advantageous way of saving for your retirement. You get tax relief on your contributions you pay in, tax-efficient growth, and when you take your pension money you can usually take up to a quarter of it tax-free.
HMRC has always been concerned that people may double dip on their tax relief, by taking their tax-free cash and then immediately recycling it by ploughing it back into their pension to gain more tax relief.
To prevent this from happening, it devised a set of conditions to determine whether the tax-free cash – or pension commencement lump sum (PCLS) to give it its technical name – should be considered as ‘recycled’. Broadly these are:
the PCLS (and any other PCLSs received in a 12-month period) must be more than £7,500;
the cumulative amount of additional contributions is over 30 per cent of the amount of the PCLS; and
the contributions for the member are significantly above what they would normally be.
When judging whether the rules have been broken, HMRC isn’t just looking at whether the contributions have increased after the PCLS has been taken, it also looks at the period before. In fact, the increase in contributions is tested on a cumulative basis over five years; two years before the PCLS is taken, the tax year the PCLS was made and the two years following the payment.
If you are planning on taking a PCLS that is more than £7,500, then you will meet the first condition. If you are taking it in this tax year – 2025-26 – HMRC will look at the contributions paid in the period from 2023-24 to 2027-28.
It will look for a significant increase. For example, if you weren’t contributing anything in the first two years, but then started paying £20,000 in the third year when you took your PCLS and for the next two tax years, that might pique HMRC’s interest. But there are no hard and fast rules.
However, if your contributions naturally fluctuate over the five-year period – say because you were self-employed – then that could probably be explained.
Stopping contributions altogether after taking the PCLS isn’t necessarily going to mean ruling out recycling if contributions increased significantly just before you accessed the pension.
Even if there is a sudden spike in contributions this may not raise any flags if the pension saver has been following a consistent trend of pension saving. This condition is more likely to catch those who contribute minimal amounts, take a PCLS and markedly increase their contributions afterwards.
HMRC is also looking for evidence that the increase in contributions is a direct result of the PCLS.
But there is also a final condition that has to be satisfied before a PCLS can be said to be recycled. And that is whether the recycling was planned – in other words was it a conscious decision?
If you have a reason why you need the PCLS, and so you were not planning on recycling, then you may want to keep a written record of that to justify your actions. Just in case, HMRC question you later on.