Guidance

Lifetime allowance guidance newsletter — December 2023

Updated 8 February 2024

1. Pension commencement lump sums

Pension Schemes Newsletter 152 invited responses to the technical consultation on draft clauses published at Legislation Day 2023.

We asked for feedback on the draft legislation relating to the pension commencement lump sum (PCLS) and the impact of this on pension flexibilities.

The consultations confirmed that it was not the government’s intention to expand pension freedoms as a result of abolishing the lifetime allowance.

Following the input to this consultation, Finance Bill 2023-24 (PDF, 15.1MB) confirms that following abolition of the lifetime allowance, the lump sum a member is entitled to on commencement of their pension, known as the PCLS, is entirely free of income tax.

The legislation broadly seeks to maintain the current treatment for the PCLS, that it is 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 relevant legislation can be found at Finance Bill 2023-24 — Schedule 9 — Part 2, within paragraph 26 (1-8).

Pension commencement excess lump sum

Finance Bill 2023-24 also introduces a new authorised lump sum — the pension commencement excess lump sum (PCELS). The PCELS provides for members who are permitted, by scheme rules, to take a lump sum in excess of their lump sum allowance on commencement of their pension. The PCELS is entirely liable to income tax, charged 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 members available lump sum death benefit allowance. Any payment made in excess of the maximum limits for payment of a PCLS, that do not meet the criteria for a PCELS will be an unauthorised payment. The relevant legislation can be found at Finance Bill 2023-24 — Schedule 9 — Part 2, within paragraph 26 (9).

Trivial commutation lump sums (TCLS), winding up lump sums (WULS) and small lump sums (SLS)

Responses to the technical consultation on the draft legislation raised concerns over the increased administrative burden introduced for pension schemes if TCLS, WULS and other SLS reduced a member’s available lump sum allowance and lump sum death benefit allowance on payment.

Finance Bill 2023-24 confirms that payment of a TCLS, WULS and other SLS will not reduce a member’s available lump sum allowance, or lump sum and death benefit allowance.

The legislation also sets out that for a member to be entitled to a TCLS, WULS and other SLS, the member must have all or part of their lump sum allowances available.

The relevant legislation reflecting amendments to TCLS can be found at Finance Bill 2023-24 — Schedule 9 — Part 2, within paragraph 30 and 41 (637G).

The relevant legislation reflecting amendments to WULS can be found at Finance Bill 2023-24 — Schedule 9 — Part 2, within paragraph 31 and paragraph 41 (637G).

Responses to the technical consultation also requested clarification on how to value crystallised rights for the purposes of calculating a member’s entitlement to a TCLS.

Finance Bill 2023-24 sets out the formula, for valuation of crystallised rights, for the purposes of calculating whether a member has total benefits commuting to under £30,000, as multiplying the member’s total tax-free benefits crystallised by 4.

The aggregate of this figure and the figure given for the member’s total uncrystallised rights provides the member’s total benefits for purposes of calculating a member’s entitlement to a TCLS only.

The legislation providing this formula can be found at Finance Bill 2023-24 — Section 14 — Schedule 9 — within part 2 of paragraph 30 (2).

An example of valuation of pension rights for trivial commutation lump sums commutation limit

Member A has:

• £265,775 remaining of their lump sum allowance
• become entitled to £15,000 uncrystallised pension rights within the scheme
• not received a serious-ill health lump sum and has no protections in place

Valuation of crystallised rights (for TCLS) = ((£268,275 - £265,775) × 4) = £10,000

Value of member A’s relevant pension rights = £10,000 + £15,000 = £25,000

£25,000 is less than £30,000, so Member A is entitled to receive their full uncrystallised pension rights from the scheme as a TCLS.

2. Taxable lump sums and PAYE for employers payroll reporting

PAYE for employers payroll reporting for tax year 2024 to 2025 

The tax deducted from the excess amount over an individual’s lump sum allowance or lump sum and death benefit allowance must be reported and paid through payroll reporting.

You should report the authorised lump sums listed as follows.

Uncrystallised funds pension lump sum

If 25% of the lump sum exceeds the permitted maximum, the excess is taxable and must be reported through the payroll.

You should follow the guidance in paragraph 2.2.6 of the CWG2: further guide to PAYE and National Insurance contributions for reporting uncrystallised funds pension lump sums, and include the excess in taxable income. 

Serious ill health lump sum

For a member under 75, where the lump sum exceeds the permitted maximum, the excess is taxable and the tax deducted must be reported through payroll.

You should follow the guidance in paragraph 2.2.8 of the CWG2: further guide to PAYE and National Insurance contributions to do this.

You should report both the taxable and non-taxable elements of the payment. 

Pension commencement excess lump sum

The whole of the lump sum is taxable and tax deducted must be reported and paid through payroll reporting. You should continue to follow the guidance in the March 2023 lifetime allowance guidance newsletter to do this.

CWG2: further guide to PAYE and National Insurance contributions will be updated for tax year 2024 to 2025. 

Repayments of overpaid tax 

Where tax is deducted at emergency tax code on a month 1 basis, in some cases members may be taxed too much. 

The member can contact us after the payment has been received to claim a refund (in year) by completing a  repayment claim form P53Z and HMRC will follow the existing repayment process to refund any overpaid tax. 

Where no contact or repayment request is made, the member’s tax position will automatically be reviewed after the end of the tax year, and if necessary a tax calculation will be issued to the member detailing any over or underpayment of tax. 

We will only be able to process a repayment for the member once the tax has been reported and paid through PAYE for employers payroll.

You’ll need to make your members aware of this, if there is any delay to reporting whilst your systems are being updated. 

PAYE for employers payroll reporting for tax year 2025 to 2026 

Work is progressing on making the necessary changes to Real Time Information (RTI), to introduce a new data item to enable payroll reporting to identify pension commencement excess lump sums separately. The intention is to introduce this new field for tax year 2025 to 2026 onwards and will be included in RTI specifications, published in Autumn 2024.

In the meantime you should continue to follow the guidance in the March lifetime allowance guidance newsletter and use data field 172 to identify these lumps sums.

3. Dependants or nominees flexi-access drawdown pension or annuity (BCE 5C and BCE 5D)

We announced at legislation day 2023 in our tax information and impact note (TIIN) that as part of the work to abolish the lifetime allowance, the government welcomed views on bringing these payments in line with other pension income by charging marginal rate tax on the entirety of the payment.

Responses to the technical consultation raised concerns over this policy, which would result in some payments being subject to a tax charge, where previously the payment would have been made tax-free. 

We can confirm that Finance Bill 2023-24 does not include legislation to bring dependants or nominees flexi-access pension or annuity (BCE 5C and 5D) into taxation, and therefore these payments will remain tax-free in the absence of the lifetime allowance.

4. Enhancement factors

Respondents to the consultation also noted, under the draft legislation published at legislation day 2023, the removal of most lifetime allowance enhancement factors. Concerns were highlighted that individuals who have already applied for enhancement factors will be expecting to rely on these at future benefit crystallisation events, including the payment of lump sums and lump sum death benefits.

Finance Bill 2023-24 confirms that lump sum and lump sum death benefit enhancement factors will be available where an individual:

• holds primary protection (primary protection factor)
• has acquired rights before 6 April 2006 under a registered pension scheme by virtue of becoming entitled to a pension credit (pre-commencement pension credit factor)
• has acquired rights under a registered pension scheme by virtue of becoming entitled to a pension credit (pension credit factor)
• has been a relevant overseas individual whilst an active member of an arrangement under a registered pension scheme (non-residence factor)
• has transferred rights from a recognised overseas scheme to a registered pension scheme (recognised overseas scheme transfer factor)

These can be found at Finance Bill 2023-24 — Schedule 9 — Part 4, within paragraphs 67 and 78.

The new enhancement factors therefore no longer sit at sections 220 to 224 of Finance Act 2004. The provisions for primary protection and pre-commencement pension credits remain at paragraphs 7 and 18 of Schedule 36 to Finance Act 2004.

The legislation does not provide for any enhancement to an individual’s lump sum allowance where they hold an enhancement factor, except in the case of primary protection and pre-commencement pension credits. This is because the remainder of the current lifetime allowance enhancement factors were not designed to increase an individual’s entitlement to PCLS or uncrystallised funds pension lump sum.

Due to the abolition of the lifetime allowance, the level of increase to an individual’s lump sum and death benefit allowance will be capped at the entitlement that they had built under the lifetime allowance.

The relevant legislation for calculating enhancement factors can be found at Finance Bill 2023-24 — Schedule 9 — Part 4, within paragraph 78, which introduces new paragraphs 20A to 20E Schedule 36 to Finance Act 2004.

5. Lifetime allowance protections and enhancements — application deadlines

As a result of the abolition of the lifetime allowance, deadlines have now been applied to certain lifetime allowance protections.

Fixed protection 2016 and individual protection 2016

The application deadline for both fixed protection 2016 and individual protection 2016 is 5 April 2025.

After this date, individuals will not be able to apply for either of these protections.

If needed, individuals can apply for either or both of these protections before the deadline online.

This service will be updated from 6 April 2025.

International enhancements

For overseas individuals with accrual under a registered pension scheme, or transfers from a recognised overseas pension scheme, the deadline to apply for international enhancements is 5 April 2025.

The deadline for an application is 31 January following the end of the tax year, 5 years after the end of the tax year in which the accrual period ends, or in which the recognised overseas scheme transfer took place.

If 5 April 2025 is before this date, the deadline is 5 April 2025.

The latest date of the period of overseas membership or date of transfer is 5 April 2024, as the lifetime allowance will be abolished from 6 April 2024.

Pension credit enhancements

The deadline to apply for pension credit enhancements from previously crystallised rights is 5 April 2025.

The deadline is 31 January following the end of the tax year, 5 years after the end of the tax year in which they legally became entitled to the pension credit.

If 5 April 2025 is before this date, the deadline is 5 April 2025.

The date of the pension sharing order cannot be any later than 5 April 2024, as the lifetime allowance will be abolished from 6 April 2024.

Application deadlines can be found at Finance Bill 2023-24 — Paragraph 94, within part 4, schedule 9.

6. Scheme administrator reporting

Finance Bill 2023-24 sets out the information and reporting requirements that apply after the removal of the lifetime allowance. We have, where feasible, adopted similar approaches to those required under current legislation.

Event Report

From the tax year 2024 to 2025 onwards a new event will be added to the Event Report on the managing pension schemes (MPS) service, in respect of the payment of a lump sum or lump sum death benefit in relation to relevant benefit crystallisation events — Event 24.

The scheme administrator of a registered pension scheme must give HMRC information about these payments and any income tax due on any amount over the new allowances, along with any valid protection the individual is relying upon.

The relevant legislation reflecting the introduction of Event 24 can be found at Finance Bill 2023-24 — Section 14 — Schedule 9 — Part 5, within paragraph 106.

Event 24 applies where the member has had a relevant benefit crystallisation event (RBCE) that exceeds their available allowance, or where the member has had an RBCE, where it would have exceeded their available allowance, but the member is relying upon a protection or enhancement factor.

The legislation, as drafted, provides for Event 24 to apply every time a lump sum is paid. We can confirm this is an error and will be amended at the earliest opportunity.

We’ll be introducing bulk reporting for the new Event 24, allowing you to bulk import data from a spreadsheet directly on to MPS in the same way as for other events.

As we develop the new event, we’ll provide further updates and guidance in future newsletters.

As a result of fully abolishing the lifetime allowance charge from the 2024 to 2025 tax year, within the event report we’ll also be removing:

• Event 2
• Event 6
• Event 7
• Event 8
• Event 8a

Relevant benefit crystallisation event (RBCE) statement

Following the introduction of RBCE’s, an individual will be given an RBCE statement by the scheme administrator (or insurance company). This statement will tell the individual how much of their allowances have been used up by the RBCE.

As with current BCE statements, the individual can then use this information to work out if they have any allowances remaining, and to correctly complete any tax return. The relevant legislation reflecting the introduction of the RBCE statement can be found at Finance Bill 2023-24 — Section 14 — Schedule 9 — Part 5, in paragraph 117.

Where an individual received an annual BCE statement prior to 6 April 2024, they will receive an annual RBCE statement. The relevant legislation can be found at Finance Bill 2023-24 — Section 14 — Schedule 9 — Part 6, in paragraph 128.

Where an individual received a BCE statement, but they are not receiving pension income, they must be provided with a BCE statement on or before 5 April 2025. The relevant legislation can be found at Finance Bill 2023-24 — Section 14 — Schedule 9 — Part 6, in paragraph 130.

7. Lump sum death benefits

In pension schemes newsletter 149 — April 2023 we explained for the 2023 to 2024 tax year, we would continue to use the current process for taxation of the defined benefits lump sum death benefits or uncrystallised funds lump sum death benefit.

This means that if the member’s legal personal representative identified a chargeable amount after payment of a defined benefits lump sum death benefit or uncrystallised funds lump sum death benefit, they should report this to HMRC.

We can now confirm that we’ve made this process permanent.

This process will also apply in respect of lump sum death benefits for:

• pension protection
• annuity protection
• drawdown pension fund
• flexi-access drawdown

To speed up the reporting and assessing of a beneficiary’s income tax liability following the payment of a lump sum death benefit, the personal representative is required to provide additional information to HMRC.

This additional information is in respect of the deceased member and:

• their pension schemes
• their beneficiaries
• the amount by which their lump sum and death benefit allowance has been exceeded

This would already routinely be requested from personal representatives where HMRC are assessing tax liability.

The legislation reflecting the requirement to provide additional information can be found at Finance Bill 2023-24 — Section 14 — Schedule 9 — Part 5, within paragraph 110.

From 6 April 2025, we will update the process for legal personal representatives to notify HMRC of lump sum death benefit charges on beneficiaries. We will be creating new guidance, with a form for legal personal representatives to complete.

This will mean that we have the information needed to raise the charge at the beneficiary’s marginal rate.

As with the 2023 to 2024 tax year, we will not be able to raise the charges until the tax year has ended, as we will not be able to determine their marginal rate until this point.

8. Lump sum death benefits from before 6 April 2024 crystallised funds

Finance Bill 2023-24 amends the definition of a ‘relevant lump sum death benefit’ within section 637S (availability of individuals’ lump sum death benefit allowance) so that it does not include death benefits paid from rights crystallised before 6 April 2024.

9. International — overseas transfer allowance (OTA)

The abolition of the lifetime allowance charge from 6 April 2023 created new circumstances under which transfers from registered pension schemes to qualifying recognised overseas pension schemes (QROPS) would be entirely tax-free.

Finance Bill 2023-24 provides for an ‘overseas transfer allowance’. This will be set at the same level as an individual’s lump sum and death benefit allowance to account for any protected level of allowance.

Where an individual’s total transfers from a registered pension scheme or a relieved non-UK pension scheme to a QROPS exceed their overseas transfer allowance, the excess will be subject to a 25% overseas transfer charge (OTC). However, where the total value of that transfer would already be subject to a 25% OTC because no existing exclusion applies, whilst the transfer will reduce the individual’s available overseas transfer allowance, there will be no additional charge on the excess.

Transfers overseas will not impact the availability of an individual’s lump sum and death benefit allowance.

These provisions can be found at Finance Bill 2023-24 — Part 3 — Schedule 9, within paragraphs 44 to 58.

The following table provides an overview of the 2 types of OTC in respect of original and onward transfers. The table does not cover block transfers.

Original Transfer — Scenario	Original Transfer — Charge	Onward Transfer — Scenario	Onward Transfer — Charge
An exclusion to the OTC applies but the transferred value exceeds the member’s available OTA	S244IA	An exclusion still applies	None
An exclusion to the OTC applies but the transferred value exceeds the member’s available OTA	S244IA	No exclusion applies	S244AC on the amount not already subject to a charge under s244IA
An exclusion to the OTC applies and the transferred value is below the member’s available OTA	None	An exclusion still applies	None
An exclusion to the OTC applies and the transferred value is below the member’s available OTA	None	No exclusion applies	S244AC
No exclusion to the OTC applies and the transferred value exceeds the member’s available OTA	S244AC	An exclusion applies	S244AC repayable and replaced with S244IA
No exclusion to the OTC applies and the transferred value exceeds the member’s available OTA	S244AC	No exclusion applies	None
No exclusion to the OTC applies and the transferred value is below member’s the OTA	S244AC	An exclusion applies	S244AC repayable and no further charge
No exclusion to the OTC applies and the transferred value is below member’s the OTA	S244AC	No exclusion applies	None

APSS262 form

From April 2024 the APSS262 form, used to report a transfer of funds or assets from a registered pension scheme to a QROPS, will be amended to reflect the updates to the OTC, and the OTA, so that this can be reported correctly to HMRC.

From April 2025, we will introduce the functionality to submit the APSS262 form on the MPS service.  

Further guidance and updates will be available in future newsletters.

10. International — member payment charges

The removal of the lifetime allowance from tax legislation would also create circumstances where the payment of lump sums and lump sum death benefits to certain members of relevant non-UK pension schemes would be entirely tax-free.

Finance Bill 2023-24 therefore amends the member payment provisions to include the charges to tax under Part 9 of Income Tax Earnings and Pensions Act (ITEPA) 2003 (applied by the new Chapter 15A). This is 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 lump sum and death benefit allowance.

Where a lump sum or lump sum death benefit is already taxed as pension income and these tax charges fall in scope of the member payment charges, for instance on payment of a trivial commutation lump sum, this will continue to apply.

The changes to the member payment provisions can be found at Finance Bill 2023-24 — Part 3 — Schedule 9, within paragraph 60, which amends paragraph 1 of Schedule 34 to Finance Act 2004.

However, paragraph 60(3) clarifies that, where the payment is of a serious ill-health lump sum or an authorised lump sum death benefit in respect of a member who died under age 75, and where this payment is to or in respect of a transfer member of a relevant non-UK pension scheme, it will remain tax-free. This is to maintain the current tax treatment of these particular lump sums for transfer members.

Where overseas pension schemes are not currently brought into reporting requirements related to BCE, there will also be no new requirements for them to report against relevant benefit crystallisation events.

Amendments have therefore been made to regulations 15 and 18 of the pensions schemes (application of UK provisions to relevant non-UK schemes) regulations 2006, at Finance Bill 2023-24 — Part 3 — Schedule 9, within Paragraphs 62.

For schemes already required to report in relation to BCE, moving forward they will only be required to comply with reporting requirements related to relevant benefit crystallisation events. This can be found at Finance Bill 2023-24 — Part 3 — Schedule 9,within paragraph 59, which amends Schedule 33 to Finance Act 2004.

11. Transitional arrangements

Finance Bill 2023-24 provides for the necessary transitional arrangements for individuals where a BCE has occurred prior to 6 April 2024.

In summary, they will have used some or all of their lifetime allowance, and this will need to be accounted for in determining how much of their new allowances is available.

Individual’s lump sum allowance

An individual’s lump sum allowance is calculated by deducting 25% of the amount of the individual’s lifetime allowance previously used, as of 6 April 2024. The relevant legislation can be found in Finance Bill 2023-24 — Schedule 9 — Part 6, in paragraph 125.

In the event the individual has used all their lifetime allowance their lump sum allowance will be set to zero.

Individual’s lump sum and death benefit allowance

The individual’s lump sum and death benefit allowance is calculated by deducting ‘the appropriate percentage’ of the amount of the individual’s lifetime allowance previously used, from 6 April 2024.

The ‘appropriate percentage’ means 100% if the individual had become entitled to take a serious ill health lump sum before 6 April 2024 and is under age 75 when it is paid, or if the individual died under age 75 and a lump sum death benefit was paid in respect of the individual before 6 April 2024. If neither of these events have occurred, 25% of the previously used amount is deducted.

In the event the individual has used all their lifetime allowance their lump sum and death benefit allowance will be set to zero.

The relevant legislation can be found in Finance Bill 2023-24 — Schedule 9 — Part 6, in paragraph 126.

Transitional tax-free amount certificates — Schedule 9 — Part 6 — Paragraph 127

Individuals with complete and accurate records of the previous tax-free amounts they have received may request that their scheme use this evidence instead of the calculations set out above.

Where a pension scheme is satisfied the member has provided complete evidence, they must issue a transitional tax-free amount certificate which will certify that the pension scheme administrator is satisfied with the individual’s lump sum transitional tax-free amount and lump sum and death benefit transitional tax-free amount.

These updated tax-free amounts then replace the 25% for the lump sum allowance calculation and replace the ‘appropriate percentage’ or 25% for the lump sum and death benefit allowance calculation.

12. Protection look-up service

In 2025, we will be looking to move the current protection look-up service into the MPS service.

This will allow us to provide additional information to registered pension scheme administrators and practitioners, when checking whether the protection that a member has informed them they are relying on, for a higher lump sum, is valid.

We will provide further information on this in future newsletters.

13. Further information

At Autumn Statement, 22 November 2023, the government confirmed that it will implement the abolition of the lifetime allowance from 6 April 2024.

HMRC are ready to support schemes through this implementation period. We would welcome views from schemes on which aspects of the legislation they would most like to be covered in future communications, and whether further lifetime allowance working groups would be helpful to walk through the detail and effect of the legislation.

Please continue to send any communications to policypensions@hmrc.gov.uk.