At a glance
- With effect from 6 April 2024, the Lifetime Allowance (LTA) tax relief will be abolished.
- From 6 April, most pension payments from a registered pension scheme will be subject to income tax, charged at the recipient’s marginal rate.
- It is worth noting, that whilst this is a significant change to the pensions tax regime, the Labour Party has said that, if it were to win the General Election, it would reinstate the LTA.
Background
Since 2006, the LTA has limited the total amount of tax-relieved pension savings that a person can build up over their lifetime across all their pension schemes without incurring an additional tax charge, which until April 2023 was 55% (an LTA charge). The LTA for most people in the 2023/4 tax year is GBP1,073,100. With effect from 6 April 2024 (L-Day), the LTA will be abolished. The Government’s main motivation for this significant policy change is the adverse impact the LTA has on senior NHS doctors and other high earners.
What will change?
From L-Day, most pension payments from a registered pension scheme will be subject to income tax, charged at the recipient’s marginal rate. There will no longer be a requirement to test the total capital value of a pension against the LTA and there will no longer be an LTA charge.
Instead, payments of certain lump sums and lump-sum death benefits will benefit from two new tax allowances (ie will be tax free within those allowances): a lump sum allowance (LSA) of GBP268,275 and a lump sum and death benefit allowance (LS&DBA) of GBP1,073,100. To the extent that payment of any lump sum takes the total lump sums payable to and in respect of a member over the relevant allowances, the excess is subject to income tax.
There will also be a new type of authorised lump sum known as a pension commencement excess lump sum (PCELS). The PCELS can be used where scheme rules allow members to take a lump sum on pension commencement that exceeds their PCLS. Again, the PCELS will be taxed as income at the member’s marginal rate.
What does this mean for employers?
- Scheme trustees and employers will be considering whether they need to make any changes to their scheme rules. For example, some scheme rules expressly cap the amount of savings a member is permitted to make by reference to the LTA.
- Employers should review any arrangements they have made in the past to help high earners avoid breaching the LTA eg alternative savings arrangements such as excepted group life schemes or one-off or ongoing compensatory payments. Such individuals may wish to recommence pension saving instead.
- Scheme employers may wish to consider allowing the payment of a PCELS under their rules.
- Employers should review any employee communications that refer to the LTA.
It is worth noting, that whilst this is a significant change to the pensions tax regime, the Labour Party has said that, if it were to win the General Election, it would reinstate the LTA.
If you have any questions, please feel free to contact Megan Sumpster or a fee-earner in the Pensions team.
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