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.

To prevent a double tax charge under both the lifetime allowance charge and the recycling rule, if the lifetime allowance charge arose on any part of the pension commencement lump sum, that part is not treated as an unauthorised payment under the recycling rule.

Normally, of course, pension commencement lump sums will be tax-free. But if a pension commencement lump sum is paid when all or 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 excess is liable to a 55% tax charge under the lifetime allowance provisions. Any part of a pension commencement lump sum that exceeds the individual’s lifetime allowance is treated as a lifetime allowance excess lump sum rather than an unauthorised payment.

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

Where the significantly increased contributions are made on or 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.