Abolition of the Lifetime Allowance – publication of HMRC Lifetime Allowance guidance newsletter

Following removal of the Lifetime Allowance (LTA) charge from 6 April 2024, and subsequent publication of Finance Bill 2024 provisions to abolish the LTA altogether from 6 April 2024, HMRC has issued the second of its 'Lifetime Allowance guidance newsletters' in December 2023. The newsletter provides an update on technical issues relating to the abolition of the LTA and further information as to how certain provision of the Finance Bill are intended to operate.

We set out below some of the key points from the newsletter, with follow-up actions for scheme sponsors and trustees.

Pension commencement lump sums

As set out in the Finance Bill, HMRC's newsletter confirms that following abolition of the LTA, while the pension commencement lump sum (PCLS), which is the lump sum that a member is entitled to on commencement of their pension, will remain  entirely free of income tax, the legislation will broadly seek to maintain the current treatment in respect of any excess.

The PCLS will be limited to the lower of 25% of the member's benefits crystallising, or so much of the member's lump sum allowance or lump sum death benefit allowance available when the member becomes entitled to the lump sum.

The Finance Bill  introduces a new authorised lump sum – the pension commencement excess lump sum (PCELS) – which provides for members whose scheme rules permit them to take a lump sum in excess of their lump sum allowance on commencement of their pension. The PCELS is liable to income tax at the member's marginal rate. The PCELS is only payable where the member has used up all of their lump sum allowance, and the total of the lump sum for payment on commencement of the member’s pension exceeds the member's available lump sum and death benefit allowance (LSDBA), which will be set at £1,073,100. With regard to the trivial commutation lump sums, winding up lump sums and other small lump sums, HMRC's newsletter confirms that these will not reduce a member's available lump sum allowance or LSDBA, allaying concerns regarding a potential increased administrative burden.

Lump sums and payroll reporting

For the tax year 2024/25, the newsletter notes that income tax payable in respect of the excess amount over an individual's lump sum allowance or LSDBA is to be reported and paid through PAYE, as is any tax due in respect of the uncrystallised funds pension lump sum, serious health lump sum and PCELS.

If a member is taxed too much due to the use of an emergency tax code, members can use form P53Z to claim an in-year refund. Alternatively, HMRC will automatically review a member's tax position after the end of the tax year, and any repayment will be processed following reporting and payment of the tax through PAYE.

For the tax year 2025/26, a new data item will be introduced to Real Time Information which will enable the separate identification of a PCELS.

Taxation of dependants or nominees flexi-access drawdown pensions or annuities

HMRC's newsletter notes that its proposal to bring these payments into line with other pension income by charging marginal rate income tax on the entirety of the payment will not be taken forward. These payments will remain tax-free in the absence of the lifetime allowance.

Reporting requirements

Information and reporting requirements applying following removal of the LTA are set out in the Finance Bill. HMRC notes that the current approach has been retained wherever possible.

From tax year 2024/25, changes will be made to the Event Report within the 'managing pension schemes' service. A new 'Event 24' will be added, in respect of the payment of a lump sum or lump sum death benefit in relation to relevant benefit crystallisation events (RBCE), requiring payment and income tax information to be provided by a scheme administrator. It is intended that Event 24 will apply where the member has had a RBCE that exceeds their available allowance (or would have exceeded their available allowance, but the member is relying on a protection). The newsletter confirms that although the Finance Bill provides for Event 24 to apply every time a lump sum is paid, this is an error and will be amended at the earliest opportunity. Additionally, a number of Events (2, 6, 7, 8 and 8a) will be removed from the Report.

As set out in the Finance Bill, a new RBCE statement will be introduced, to be provided to members by a scheme administrator, setting out how much a member's allowances have been used up by the RBCE.

International considerations

HMRC's newsletter notes two developments regarding non-UK pension schemes.

First, a new 'overseas transfer allowance', to be set at the same level as the LSDBA, will be introduced. Where an individual's total transfers from a registered pension scheme or a relieved non-UK pension scheme to a qualifying recognised overseas pension scheme exceed this allowance, the excess will be subject to a 25% overseas transfer charge.

Second, the existing member payment provisions are to be amended by the Finance Bill, to apply in certain circumstances where a lump sum or lump sum death benefit is paid to a relieved or transfer member of a relevant non-UK pension scheme, and the payment exceeds either their available lump sum allowance or LSDBA.

Transitional tax-free amount certificates

The Finance Bill provides for transitional arrangements for individuals where a Benefit Crystallisation Event has occurred prior to 6 April 2024, which will need to be taken into account in determining how much of their new allowance is available.  From 6 April 2024, individuals may request that any pension scheme of which they are a member issues a 'transitional tax-free amount certificate', setting out their transitional tax-free amount and lump sum and death benefit tax-free amount. Individuals will be required to provide the scheme with records of the previous tax-free amounts they have received in order that such certification can be provided.

Key action points for sponsors and trustees

• Consider how to deal with the overall changes and developments outlined above in member communications, including member retirement packs and member handbooks. Initial communications outlining the changes in general terms may now need to be updated.
• Confirm that the scheme administrator will be prepared to operate the new regime from 6 April 2024, in particular in relation to:
  • any new and additional PAYE obligations in respect of income tax due on excess lump sums and any new reporting obligations.
  • procedures to deal with the requests for transitional tax-free amount certificates, and the associated review of information provided by members.
• Review whether any benefit design remains appropriate , in particular checking for provisions or caps that refer to the LTA, or arrangements that were included alongside the LTA, that may need to be removed or amended.
• Review Trust deed and Rules and make appropriate amendments to remove references to the LTA or add provisions related to new lump sum allowances.

Please contact us if you would like to discuss any of the issues highlighted in this edition.