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Summary Plastic recycling is promoted in the transition toward a circular economy and a closed plastic loop, typically using mass‐based recycling targets. Plastic from household waste (HHW) is contaminated and heterogeneous, and recycled plastic from HHW often has a limited application range, due to reduced quality. To correctly assess the ability to close plastic loops via recycling, both plastic quantities and qualities need to be evaluated. This study defines a circularity potential representing the ability of a recovery system to close material loops assuming steady‐state market conditions. Based on an average plastic waste composition including impurities, 84 recovery scenarios representing a wide range of sorting schemes, source‐separation efficiencies, and material recovery facility (MRF) configurations and performances were assessed. The qualities of the recovered fractions were assessed based on contamination and the circularity potential calculated for each scenario in a European context. Across all scenarios, 17% to 100% of the generated plastic mass could be recovered, with higher source‐separation and MRF efficiencies leading to higher recovery. Including quality, however, at best 55% of the generated plastic was suitable for recycling due to contamination. Source‐separation, a high number of target fractions, and efficient MRF recovery were found to be critical. The circularity potential illustrated that less than 42% of the plastic loop can be closed with current technology and raw material demands. Hence, Europe is still far from able to close the plastic loop. When transitioning toward a circular economy, the focus should be on limiting impurities and losses through product design, technology improvement, and more targeted plastic waste management.

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