Changes to the Lifetime allowance (LTA)
Following the Chancellor’s announcement in 2023 Spring Budget, the LTA was effectively abolished from 6 April 2023.
The LTA (set at £1,073,100 for the 2023/24 tax year) was a limit on the pension savings that a person could build up in a tax-friendly environment, without being subject to a tax charge. On taking payment (‘crystallising’) of a pension benefit, a person would use up part of their available LTA. If the same person had multiple pension benefits across different pension schemes, they’d continue to use up part of the available LTA for each pension benefit being taken. If a person’s total pension savings were large enough, they could, potentially, use all their available LTA and be subject to a tax charge on any ‘excess’ pension benefits.
For the 2023/24 tax year, the Chancellor announced that, the LTA tax charge would be reduced to 0% as an interim measure, thereby effectively abolishing the LTA. Consequently, any pension benefits paid in excess of a person’s available LTA would be taxed at a person’s marginal rate.
The Government plan to properly abolish the LTA from 6 April 2024 and remove it from existing pensions legislation. However, this is more complex than simply reducing the LTA charge to 0%, so the Government are currently consulting on how this is best achieved.
For reference, the maximum tax free lump sum that a person can receive is the lesser of £268,275 (which was 25% of the LTA of £1,073,100) or 25% of their available LTA. Although abolishing the LTA, the Government plans to retain the lump sum ‘cap’ of £268,275, unless a person holds LTA protection. Any lump sum paid in excess of the ‘cap’ would then be taxed at a person’s marginal rate.
Annual allowance (AA)
The AA is set by the Treasury and, following the Chancellor’s announcement in the 2023 Spring Budget, is set at £60,000 for the 2023/24 tax year. This is the amount by which the value of your pension savings may increase in any one year without you having to pay an excess tax charge. Your personal AA may be less than £60,000 if your taxable income exceeds HMRC limits or you’ve got money purchase/defined contribution pension rights held in another pension scheme, where those rights have been taken as ‘flexible benefits’.