RPSM04104960 - Technical Pages: Taxation: Unauthorised Payments: Recycling of pension commencement lump sums: Deemed Unauthorised Payment

Deemed unauthorised payment

When the recycling rule is triggered, the amount of the pension commencement lump sum is treated as an unauthorised member payment. However, if the lifetime allowance charge arose on any part of the pension commencement lump sum, that part of the lump sum is not treated as an unauthorised payment. This prevents a double charge under both the lifetime allowance charge and the recycling rule.

Normally, of course, pension commencement lump sums will be tax-free, but if a pension commencement lump sum is paid when part of the individual’s lifetime allowance is available, and the amount crystallised by the pension commencement lump sum exceeds the individual’s available lifetime allowance, the part that exceeds the lifetime allowance is a chargeable amount for the purposes of the lifetime allowance provisions and will be taxable at 55%. Thus the part of a pension commencement lump sum that exceeds the individual’s lifetime allowance is treated the same as a lifetime allowance excess lump sum.

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

In cases where the significantly increased contributions are made after receipt of the pension commencement lump sum, then the date when all the conditions for the recycling rule to apply are met will be the date those significantly increased contributions are made. Where the contributions are significantly increased before the receipt of the lump sum, the date when all of the conditions for the recycling rule to apply are met will be the date of the payment of the pension commencement lump sum.