Surge in pensioners using £10k ‘recycling loophole’ to avoid tax | Personal Finance | Finance

The number of people who contributed exactly £10,000 into their pension in the last financial year rose by 2%, according to one large UK pension provider.

Hargreaves Lansdown (HL) said these people will have already retired but want to continue putting money into a pension and potentially saving tax using the Money Purchase Annual Allowance (MPAA). The MPAA this allows anyone who has already started taking their pension to keep paying in £10,000 a year into a personal pension to save on tax.

If they are a basic rate taxpayer this could save them £2,000 tax a year, or £4,000 if their income means they are a higher rate taxpayer.

The Money Purchase Annual Allowance (MPAA) is a reduced annual allowance for pension contributions, currently set at £10,000, the allowance rises to £60,000 a year if you are still working.

The allowance means someone who has started taking their pension can still pay up to £10,000 into a pension, and get tax relief.

One expert said the allowance in therory could allow someone to reduce their income so they only pay basic rate tax, effectively recycling their pension.

Helen Morrissey said: “The number of people contributing exactly £10,000 in the last financial year rose by 2%. This could be indicative of people making use of the Money Purchase Annual Allowance.”

What is the money purchase annual allowance?

The money purchase annual allowance only affects you if you have a defined contribution pension that you’ve flexibly taken taxable money from.

It’s a yearly limit on how much can be paid into your pension(s) and still be eligible for tax relief. The MPAA means:

• your contributions must be less than (or equal to) the amount you earn and
• contributions from you and your employer must be less than £10,000.

Example: If you earn £5,000, you could pay up to £5,000 into your pension without paying tax (£4,000 of your money and £1,000 in tax relief). If you did this, your employer could contribute another £5,000.

If you earn less than £3,600, you can get tax relief on up to £3,600 of pension savings until age 75 (£2,880 of your money and £720 in tax relief).