UK’s Lifetime Allowance Tax Charge to be Abolished
01 June, 2023
What has happened?
In a surprise announcement, the UK Chancellor confirmed in the Spring Budget that the UK’s Lifetime Allowance (LTA) for pensions would be abolished from 6 April 2024. For the 2023/24 tax year, the LTA will remain in place, and pension providers will still be required to carry out applicable LTA checks, but if your pension savings exceeds your applicable LTA no LTA charge will be applied.
What is the UK’s LTA?
The UK’s LTA has been the amount of savings you could take from all your UK pension savings (excluding the UK State Pension) without facing a UK tax charge. The LTA applied irrespective of the fact you are no longer a UK resident and/or taxpayer.
It was introduced on 6 April 2006 and was initially set at £1.5M for the 2006/07 tax year. The LTA rose each tax year up to £1.8M in the 2010/11 tax year, but since then has progressively been lowered by the UK government. Since 5 April 2020, the standard Lifetime Allowance has been £1,073,100.
You would only be tested against the LTA at specific points, as defined in UK tax legislation. These points are called benefit crystallization events (BCE). The most common BCE has been when you decided to draw from your UK pension savings. Other examples included on your death and at age 75.
The LTA tax charge differed depending upon how you drew your UK pension savings at retirement. The tax charges were:
- Lump Sum Payments = 55% of any amount you took from your pension savings as a lump sum that was over the LTA; or
- Pension Income Payments = 25% of any amount you took from your pension savings as pension income that was over the LTA
How does this affect my 25% UK tax-free lump sum?
While there won’t be any LTA charges in 2023/24, what your individual LTA is will still be relevant as it determines what level of UK tax-free pension commencement lump sum (PCLS) you have if you draw any pension benefits. Your PCLS remains limited to 25% of your available LTA.
The standard LTA for 2023/24 remains £1,073,100. However, your pension savings may already be protected with a higher LTA limit. Each time the LTA has been reduced since 2006, the UK government has enabled people to apply to HMRC for LTA protection. By way of example, Fixed Protection 2016 provides a Lifetime Allowance of £1.25M. If you have applied for protection in the past, you should have received a certificate to confirm the protection.
You may potentially still be able to apply to the UK’s HMRC for one or more of the protections available since the Lifetime Allowance was most recently reduced in April 2016. These protections are Fixed Protection 2016 and Individual Protection 2016. Whether or not you apply for one or both of these protections will depend upon your personal circumstances.
An Important Health Warning
If you have pension savings at or near your LTA limit, the Chancellor’s announcement will be very welcome news. However, the UK’s Labour party has voiced its strong opposition to the LTA abolition. With a general election in the next two years, if Labour were to come to power, we could see a reversal of the LTA abolition. As a result, any pension planning made on the basis of the LTA abolition must come with a significant health warning. It is currently unclear what changes Labour would implement. Although commentators think it unlikely that Labour would simply reimpose the LTA as it was, some version of the LTA could be reintroduced.