1. What is TFC recycling?
TFC is known under legislation as a pension commencement lump sum (PCLS). Recycling is where the sole purpose of taking a PCLS, is to increase contributions into a pension.
HMRC says “The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax-relieved, contribution to a registered pension scheme.”
Where recycling takes place any PCLS paid out will be classed as an unauthorised payment and an unauthorised payments charge will be due.
2. Criteria
To qualify as recycling, four specific criteria must be met. If any of these are not satisfied, it does not count as recycling. The criteria are:
- A PCLS (Pension Commencement Lump Sum) of £7,500 or more is taken.
- Additional contributions over a 5-year period exceed 30% of the PCLS taken.
- Additional contributions over a 5-year period are more than 30% higher than what would normally be contributed.
- The recycling was pre-planned, meaning the PCLS was taken with the intention of increasing contributions.
3. Timing
It does not matter who pays the contributions or whether the contributions are made before or after the PCLS is taken.
The 5-year period where contributions are assessed consists of:
- Two tax years before the PCLS is taken
- The tax year the PCLS is taken
- Two tax years after the PCLS is taken.
