Pension recycling means using tax-free cash to pay back into a pension for extra tax relief; HMRC can treat it as an unauthorised payment.
Most people asking what pension recycling is want to know whether paying into a pension after taking tax-free cash is a problem. Usually it is not: HMRC's guidance says "very few lump sum payments will be affected by this recycling rule", and cash taken as part of normal retirement planning is not caught. For your own plans, Pension Wise offers free, impartial, government-backed guidance. If your position stays unclear after reading this, describe it briefly on this page's form; a free phone call then follows from an adviser at a firm authorised by the FCA, who can lay the lump sum and contributions side by side.
What pension recycling is, and what the rule targets
The rule sits in paragraph 3A of Schedule 29 to the Finance Act 2004. It starts from the tax-free cash described in the pension tax-free lump sum guide, which the legislation calls a pension commencement lump sum, and says that where the paragraph applies "the pension scheme is to be treated as making to the member an unauthorised payment". The sum treated that way is the amount of the lump sum.
The loop it targets: tax-free cash comes out, goes back in as a contribution that attracts pension tax relief, and that contribution can later produce more tax-free cash. HMRC's Pensions Tax Manual describes the rule as a guard against systematic use of this loop to multiply relief.
The conditions that all have to be met
HMRC's manual lists six conditions and says the rule applies "when all of the following conditions are met". Fail one and recycling has not occurred.
- The individual receives a pension commencement lump sum.
- Because of that lump sum, contributions paid into a registered pension scheme in respect of the individual are significantly greater than they otherwise would be.
- The extra contributions can come from the individual or from someone else, such as an employer, so the payer does not decide the outcome.
- The recycling was pre-planned.
- That lump sum, added to any other such lump sums in the previous 12 months, is more than £7,500 (for events on or after 6 April 2015).
- The cumulative extra contributions are more than 30% of the lump sum.
The statute's own test for pre-planning is whether "the member envisaged at the relevant time that that would be so". It turns the £7,500 and 30% conditions into exclusions, and adds a third: the rule does not apply to someone aged 75 or over when the contributions are paid, provided none of them comes from an employer (see tax relief after 75).
Pre-planned: who has to prove what
"Pre-planned" has a narrow meaning. HMRC's guidance says the individual "must have intended from the outset" to take the lump sum to enable significantly greater contributions. Someone who takes cash and only later decides to put some back has not pre-planned. The burden sits with HMRC: "the onus is on HMRC to show that pre-planning took place", though an officer can weigh any evidence pointing that way. The intention has to exist at the statute's relevant time, which is when the lump sum is paid or, if the extra contributions came first, when they began. It cannot arise afterwards.
The rule also reaches arrangements, not only a straight swap of cash for contribution: anything from paying the lump sum straight back in through to "devices, schemes, arrangements and understandings of any kind, whether or not legally enforceable". Borrowing to make a contribution and repaying the loan from the lump sum is one example. Having other money that could have paid the contribution does not take a pre-planned arrangement outside the rule.
The two 30% tests and the measuring window
Two different 30% figures are in play, and they are easy to mix up.
The first decides whether contributions rose significantly. As a rule of thumb, HMRC accepts that a significant increase does not occur unless the additional contributions are "more than 30% of the contributions that might otherwise have been expected". The comparison is between what would have been paid with no lump sum and what was paid because of it. Increases are added up across a window of tax years: the year the lump sum is taken, the two tax years before it and the two after. Raising contributions a little each year therefore does not escape the test.
The second compares the extra contributions with the lump sum itself. HMRC's list requires them to exceed 30% of the lump sum, and the statute excludes any case where the increase "does not exceed 30% of the amount of the lump sum". The rule needs both tests to be met.
Contributions from anyone count: the member's own, payments made on the member's behalf (HMRC's example is a spouse) and employer contributions, in any combination; paying into a partner's pension is a separate question. Increases that do not happen because of the lump sum are left out, such as a scheme raising contractual contributions for all its active members.
Two worked cases
These are illustrations with invented figures, calculated on 20 October 2026, to show how the tests combine; they are not a prediction for any real person, and neither uses the age 75 exclusion.
Case A: every test met. Assume someone takes a £20,000 pension commencement lump sum, with no other such lump sum in the previous 12 months. They usually pay £8,000 a year into pensions on an unchanged basis, and from the outset they plan to pay £20,000 extra using the lump sum. The working is: £20,000 is more than £7,500; 30% x £8,000 = £2,400; £20,000 is more than £2,400; 30% x £20,000 = £6,000; £20,000 is more than £6,000. Every threshold is passed, so if HMRC can show the pre-planning, the rule applies and £20,000 is treated as an unauthorised payment.
Case B: two small lump sums. Assume a £5,000 lump sum, followed within 12 months by another of £3,000. The working is: £5,000 + £3,000 = £8,000; £8,000 is more than £7,500. Each is below £7,500 alone, but the later one is added to the earlier, so the £7,500 exclusion no longer protects it. The other conditions would still have to be met.
The second 30% test can rescue a case that meets the first. HMRC's own example has cumulative extra contributions of £3,500 after a £35,000 lump sum: a significant increase, but not recycling, because £3,500 is below 30% of the lump sum, which is £10,500.
Where the order of events or the amounts are uncertain, an FCA-authorised adviser can check them against HMRC's conditions before any money moves, and sending your details through the form here brings a free call-back.
What happens if the rule applies
The amount of the lump sum is treated as an unauthorised payment, which brings an unauthorised payments charge of 40% on the member and, where payments pass a threshold, a 15% surcharge on top; the early withdrawal penalty guide explains those charges and the threshold. The scheme administrator is separately liable to a scheme sanction charge.
HMRC treats the payment as made when all the conditions are first met, which fixes the tax year of the charge: the date the extra contributions are paid if they follow the lump sum, or the date of the lump sum if they came first. Members also have a duty. Anyone who intends to take a lump sum as part of a recycling arrangement must tell the scheme administrator "within 30 days of the date of the deemed unauthorised payment". HMRC's guidance also envisages a scheme asking a member, before paying the lump sum, to declare whether it will be used to increase contributions.
What is not recycling
Ordinary retirement planning. HMRC accepts that a person may pay significantly greater contributions from investments, salary, salary or redundancy sacrifice or savings, even where one reason for paying more is to get a larger lump sum. The rule bites only if the person intended to use the lump sum "as the means of making those increased contributions, whether in a direct or indirect way".
The indirect route is where people get caught out. In HMRC's examples, paying contributions from savings and using the lump sum to replenish them is recycling, and so is a short-term loan repaid from the lump sum. Sacrificing a bonus into a pension can be caught too, where the lump sum is taken in place of the bonus to the same effect. Paying the lump sum into the same bank account as the savings is not enough by itself.
Contributions that do not arise because of the lump sum. A pattern that moves with pay but keeps the same basis, such as a set percentage of a salary that includes bonuses, is not a significant increase. Nor is a windfall: in HMRC's example, a member who took a lump sum to clear debts, then won the lottery and paid a contribution from the winnings, is not caught, because the contribution "is made because of the lottery win and not because of the lump sum".
Paying in after flexible access. Taking money flexibly from a defined contribution pension, such as a first uncrystallised funds pension lump sum or cash from a flexi-access drawdown fund, can lower what you can pay in with tax relief. That lower limit, the money purchase annual allowance, is a separate rule with its own charge; flexi-access drawdown compared with UFPLS shows how each route sets it off, and the annual allowance guide and carry forward cover the usual limit.
Paragraph 3A is written for a pension commencement lump sum. Anyone taking an uncrystallised funds pension lump sum instead can ask the provider how it treats the tax-free part for recycling purposes.
Questions about pension recycling
Is pension recycling illegal?
The law deals with it through tax. Where the rule applies, the lump sum is treated as an unauthorised payment, the charges above follow, and the member must tell the scheme. HMRC says each case "will need to be decided on its own facts and merits".
Does it apply when a spouse pays into my pension?
It can. HMRC counts contributions made on a member's behalf, with a spouse as its example, among those that can amount to a significant increase. The other conditions still have to be met.
Can I ever put tax-free cash back into a pension?
Yes. The rule does not apply where the lump sum and any others in 12 months total £7,500 or less, where the extra contributions stay within 30% of the lump sum, where the decision to pay more came only after the cash was taken, or where you are 75 or over and no employer contributes. If you have also accessed a pension flexibly, the money purchase annual allowance may limit what you can pay in.
How far back and forward does HMRC look?
Lump sums are added together when paid within 12 months of each other. Extra contributions are measured across five tax years: the year the lump sum is taken, the two before and the two after.
What does it mean for NHS pension members?
The rule is written for pension commencement lump sums from registered pension schemes. How the NHS scheme's lump sum works is covered in the NHS pension lump sum guide, and NHS Pensions can say what it asks members to declare.
Your next step
The test turns on intention and amounts, and failing it means a tax charge on the whole lump sum. Pension Wise can explain your options free of charge, and your pension provider can say what it asks members to declare. Should a look at your real lump sum and contributions by an FCA-authorised adviser help, complete the form on this page and say what you are weighing up.
Sources, read 20 October 2026: Finance Act 2004, Schedule 29, paragraph 3A; HMRC Pensions Tax Manual, PTM133810, PTM133820, PTM133830, PTM133840, PTM133850, PTM133860, PTM134100, PTM056520; GOV.UK, Tax when you get a pension and Annual allowance.