TFC Recycling to fund spouse's pension
sch0501
Member
Good afternoon all,
We've had a client query whether he would be able to take the tax-free cash from his own pension and use it to make a contribution into his wife's pension. To me, this smacks of tax-free cash recycling but also I can't find any examples online that explicitly rule this out.
Surely this can't be allowed because else what's stopping a husband and wife taking their tax-free cash and contributing to each other's pensions??
@les_cameron thoughts??
Thanks in advance.
Comments
This is purely from a web search so don't take it as red, but from various articles it states the following:
It is permissible to use your tax-free pension cash to fund contributions into a spouse's pension without falling foul of the strict "pension recycling" rules. The recycling rules are designed to stop an individual from gaining a second round of tax relief on the same money in their own pension, which is not the case when contributing to a spouse's pension.
Key Considerations for Contributing to a Spouse's Pension
While the recycling rules do not apply, you must adhere to normal pension contribution limits and rules for your spouse:
Relevant UK Earnings: Your spouse must have sufficient "relevant UK earnings" (such as salary or self-employed income) to justify contributions and receive tax relief.
Annual Allowance: The total contributions to your spouse's pension in a tax year (including your payments, their own, and any employer contributions) cannot exceed their annual allowance, which is generally 100% of their earnings or £60,000 (whichever is lower). Higher earners may have a tapered annual allowance.
Non-Earners: If your spouse has no relevant UK earnings, the maximum that can be contributed to their pension is £2,880 net (which becomes £3,600 gross after basic rate tax relief is added) per tax year.
Tax Relief: Contributions made on behalf of your spouse will still receive the standard tax relief. For example, a £2,880 payment into their pension will be topped up to £3,600 by the government.
What is Prohibited (Pension Recycling)
HMRC's anti-recycling rules apply only when an individual takes tax-free cash and uses it to significantly increase contributions to a pension in their own name with the pre-planned intention of generating further tax relief and more tax-free cash. Breaking these rules can result in severe tax penalties, including an unauthorised payments charge of up to 55% on the original tax-free cash amount.
By contributing to your spouse's pension, you are ensuring the funds remain in a tax-efficient wrapper while bypassing the specific conditions that define a recycling breach.
It is highly recommended to speak with a qualified financial adviser to ensure all contributions are made correctly and within HMRC limits. You can also access free, impartial guidance from the government-backed MoneyHelper service
However, I think it would certainly become an issue if the spouse then took tax free cash and went back the other way for the above reasons.
PCLS recycling only applies to putting money in your own pension so this is absolutely fine. You very rarely find anything that specifically rules something out as rules are prescriptive i.e. they tell you what the rules are not what they are not.
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810#IDA1HQQB
You pass bullet 2 = no recycling
This would be subject to the recycling tests because you would be receiving a tax-free lump sum from your pension scheme and also making a contribution to your pension.
Excellent point. You'd get caught as the PCLS was an indirect way of putting money in your own pension.
Totally fine if only one way.
that all makes sense, thanks for everyone's contributions