Guidance

Lifetime allowance guidance newsletter — March 2023

Updated 27 March 2023

1. Overview

The government announced that it will abolish the lifetime allowance . As a result, from 6 April 2023 the lifetime allowance (LTA) charge would be removed. You can find the detailed proposed legislation for these changes in the Finance Bill.

The lifetime allowance will be fully abolished from the 2024 to 2025 tax year, through a future Finance Bill.

This means that from 6 April 2023 the current lifetime allowance framework remains in place and the lifetime allowance for 2023 to 2024 remains at £1,073,100.

As a pension scheme administrator, you will need to continue to operate lifetime allowance checks when paying benefits (for example assessing whether an individual has available lifetime allowance) and to issue benefit crystallisation event statements. However, following the standard lifetime allowance checks, for benefit crystallisation event occurring after 6 April 2023 no lifetime allowance charge will arise and there will be no requirement to report lifetime allowance charges on the Accounting for Tax Return (AFT).

For any benefit crystallisation event occurring before 6 April 2023 all current rules apply, including the lifetime allowance charge. For any lifetime allowance charges that arise between 1 April 2023 and 6 April 2023, these must be reported as normal on the Accounting for Tax Return for the quarter ended 30 June 2023.

2. Pension commencement lump sum and lifetime allowance protections

As a result of the abolition of the lifetime allowance, the maximum amount most members can take as a pension commencement lump sum will be frozen at £268,275, which is 25% of the current standard lifetime allowance of £1,073,100. However, members with a protected right to a higher pension commencement lump sum on 5 April 2023 will continue to be able to access this right.

All existing rules for calculating a pension commencement lump sum will remain for the 2023 to 2024 tax year.

Members who hold a valid enhanced protection or any valid fixed protections, will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection provided this protection was applied for before 15 March 2023, and a certificate or reference number subsequently issued, from 6 April 2023. They will also keep their entitlement to a higher pension commencement lump sum and will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection.

If a successful late application is made for enhanced protection or fixed protection on or after 15 March 2023, the member will be entitled to a higher pension commencement lump sum, but will be subject to all existing rules for protection cessation events. This means if they have a protection cessation event after 6 April 2023, they will lose their lifetime allowance protection.

Members who have enhanced protection with lump sum protection will still be entitled to a higher pension commencement lump sum, but the value of the lump sum will be limited based on the value of their pension pot on 5 April 2023. This means that you will need to be able to provide members with a valuation as at 5 April 2023. Any contributions made on or after 6 April 2023 will not be included for the purposes of calculating their pension commencement lump sum.

Example 1

Member holds valid enhanced protection, applied for on 30 January 2009, with lump sum protection of 40%. When taking benefits their pension pot has increased in value.

You value the member’s pension pot, as at 5 April 2023, at £1,750,000. With lump sum protection of 40%, this means they are entitled to a higher pension commencement lump sum of up to £700,000.

When the member comes to take their benefits, they have accrued an additional £500,000 and their pension pot is now valued at £2,250,000. Even though they still have valid lump sum protection of 40%, their pension commencement lump sum will be capped at £700,000.

Example 2

Member holds valid enhanced protection, applied for on 2 February 2009, with lump sum protection of 40%. When taking benefits their pension pot has decreased in value.

You value the member’s pension pot, as at 5 April 2023, at £1,600,000. With lump sum protection of 40%, this means they are entitled to a higher pension commencement lump sum of up to £640,000.

When the member comes to take their benefits, the value of their pension pot has decreased in value to £1,450,000. They will be entitled to a pension commencement lump sum of 40% of this decreased value — £580,000.

Example 3

Member makes a successful late application for enhanced protection on 20 March 2023 with lump sum protection of 40%.

You value the member’s pension pot, as at 5 April 2023, at £1,800,000. With lump sum protection of 40%, this means they are entitled to a higher pension commencement lump sum of up to £720,000.

From the date of application, the member must make sure they do not take any action causing cessation of enhanced protection, otherwise they will lose their eligibility to the higher pension commencement lump sum. Find more information on cessation events.

Example 4

Member holds valid enhanced protection, applied for on 30 January 2009, with no lump sum protection.

As the member holds no lump sum protection, their pension commencement lump sum will be limited to the lower of £375,000 or 25% of the value of their pension pot at the time of the benefit crystallisation event. Any contributions the member makes from 6 April 2023 can be included for the purposes of calculating the pension commencement lump sum.

Example 5

Member holds valid fixed protection, applied for on 1 March 2012.

The member’s pension commencement lump sum will be limited to the lower of £450,000 or 25% of the value of their pension pot at the time of the benefit crystallisation event. Any contributions the member makes from 6 April 2023 can be included for the purposes of calculating the pension commencement lump sum.

Example 6

Member makes a successful late application for fixed protection on 1 April 2023.

The member’s pension commencement lump sum will be limited to the lower of £450,000 or 25% of the value of their pension pot at the time of the benefit crystallisation event.

From the date of application, the member must make sure they do not take any action causing cessation of fixed protection, otherwise they will lose their eligibility to the higher pension commencement lump sum. Find more information on cessation events.

Example 7

Member holds valid fixed protection 2014, applied for on 5 January 2014.

The member’s pension commencement lump sum will be limited to the lower of £375,000 or 25% of the value of their pension pot at the time of the benefit crystallisation event.

Any contributions the member makes from 6 April 2023 can be included for the purposes of calculating the pension commencement lump sum.

Example 8

Member makes a successful late application for fixed protection 2014 on 1 April 2023.

The member’s pension commencement lump sum will be limited to the lower of £375,000 or 25% of the value of their pension pot at the time of the benefit crystallisation event.

From the date of application, the member must make sure they do not take any action causing cessation of fixed protection, otherwise they will lose their eligibility to the higher pension commencement lump sum. Find more information on cessation events.

Example 9

Member holds valid fixed protection 2016, applied for on 1 August 2016.

The member’s pension commencement lump sum will be limited to the lower of £312,500 or 25% of the value of their pension pot at the time of the benefit crystallisation event.

Any contributions the member makes from 6 April 2023 can be included for the purposes of calculating the pension commencement lump sum.

Example 10

Member makes a successful application for fixed protection 2016 on 7 April 2023.

The member’s pension commencement lump sum will be limited to the lower of £312,500 or 25% of the value of their pension pot at the time of the benefit crystallisation event.

From the date of application, the member must make sure they do not take any action causing cessation of fixed protection, otherwise they will lose their eligibility to the higher pension commencement lump sum. Find more information on cessation events.

3. Taxable lump sums and PAYE for employers payroll reporting

3.1 Lump sum taxation

In certain circumstances, the following payments would currently be subject to a lifetime allowance charge at 55%. From 6 April 2023, this will be replaced with income tax at the recipient’s marginal rate:

• serious ill-health lump sum
• lifetime allowance excess lump sum
• uncrystallised funds lump sum death benefit
• defined benefits lump sum death benefit

This means that from 6 April 2023, when operating the lifetime allowance checks on a member, where you identify one of these lump sums, normal PAYE rules will apply to these payments, and they will be treated as pension income.

If the member has a P45 from a previous source or employment dated on or after 6 April 2023 in the current year, you should operate the code on the P45 on a Month 1 basis and deduct the tax from the excess amount above the lifetime allowance.

In all other circumstances, including where the member has a P45 from the previous tax year, you should use the emergency tax code on a M1 (month 1) basis against the payment and deduct the tax from the excess amount above the lifetime allowance. The emergency code for the 2023 to 2024 tax year will be 1257L.

As these lump sums will be a one-off payment you will need to issue a P45 to the recipient.

For uncrystallised funds lump sum death benefit and defined benefits lump sum death benefit your processes for dealing with these will change.

From 6 April 2023, when processing these cases, you will need to first contact the Legal Personal Representative of the deceased member to find out how much available lifetime allowance the member has. You will need to tell them the type and amount of benefit you intend to pay. On receipt of the information, you will know if the member’s available lifetime allowance will be used up when you make the payment. If applicable, you should deduct tax from the excess above the lifetime allowance using the emergency tax code on a M1 (month 1) basis.

You will need to repeat this process for each lump sum payment in respect of the deceased member.

This means that where you pay benefits to a beneficiary, which would currently be subject to an lifetime allowance charge because there is an excess over the lifetime allowance, you will need to deduct tax at the marginal rate. Where after testing against the lifetime allowance there is no excess, such lump sums can be paid tax-free where the pension tax rules allow.

Where a Legal Personal Representative receives multiple requests, they should provide information about the member’s available lifetime allowance assuming that a scheme that has previously advised them that they are paying death benefits, has paid that benefit and used up lifetime allowance.

3.2 PAYE for employers payroll reporting

The tax you deduct from the excess amount above the lifetime allowance must be reported and paid through payroll reporting. Until changes can be made to employer PAYE payroll reporting to identify these lump sums separately, you will need to use some existing data items from 6 April 2023:

Data item	Description	What to enter
172	Serious ill health lump sum indicator	Enter ‘Yes’
173	Flexible drawdown taxable payment	Enter the taxable element of the payment. You must also include this amount in the ‘taxable pay to date’ and the ’taxable pay in this period’ fields.
174	Flexible drawdown non-taxable payment	Enter the non-taxable amount of the payment. You must also include this amount in the ‘non tax or NIC payment’ field 58A.
24	Starting date	Enter the time of reporting the first payment to the recipient. Do not include the starting date if it has already been reported in an earlier submission
34	Annual amount of the occupational pension	Enter the taxable amount of the lump sum paid
41A	Taxable pay to date in this employment	Enter the total taxable element of the pension paid to date
41B	Total tax to date in this employment	Enter the total tax to date in this pension
58	Taxable pay in this period	Enter the taxable pension in this pay period
58A	Value of payments not subject to tax and National Insurance contributions in pay period	Enter any non-taxable element of the pension payment for payments made by BACS
55	Tax code operated on this payment	Use the emergency tax code on a ‘Week 1’ or ‘Month 1’ basis or where you have a current year P45, use that code on a ‘Week 1 or Month 1’ basis
145	Occupational pension indicator	Enter ‘Yes’
38	Payroll ID	Include the payroll ID, if you want to use one
42	Pay frequency	Select ‘One-Off’
41	Leaving date	Use the date of payment as the leaving date on their payroll record so this is sent to HMRC when you report your payroll information

We understand that it may take time to update your systems to report this through your PAYE employer payroll. You should do this as soon as possible and by no later than 30 September 2023. Until your systems are updated, you should still deduct the tax from the excess above the lifetime allowance using the current year P45 for the member, or using emergency tax code, on a M1 (month 1) basis. Once your systems are updated, you must report and pay all tax deducted from payments from 6 April 2023 onwards and issue any outstanding P45’s.

Employer further guide to PAYE and National Insurance Contributions — CWG2 will be updated as soon as possible and we will provide an update in a future newsletter.

If you’re unable to update your systems by 30 September 2023, email ltaadministration@hmrc.gov.uk and put ‘Lump Sum PAYE for employers payroll reporting’ in the subject line.

3.3 Repayments of overpaid tax

Where tax is deducted at emergency tax code on a M1 (month 1) basis, in some cases members may be taxed too much.

The member can contact HMRC after the payment has been received to claim a refund (in year) by completing a Repayment Claim Form P53Z and we 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.

4. Public Service Pensions Remedy (McCloud)

The Public Service Pensions Remedy is intended, as far as possible, to put members into the same position that they would have been in had the discrimination not occurred.

The changes to the lifetime allowance do not alter this approach. Schemes should continue to implement the remedy as planned.

Any specific questions or issues that these Budget changes pose for the remedy should be directed to your usual contacts in HMT or HMRC.

5. Further guidance

Updated GOV.UK guidance for members will be published on 6 April 2023.

We will provide further updates on the lifetime allowance changes through future lifetime allowance guidance newsletters, but this guidance will not be reflected on GOV.UK. Once the full changes have been implemented, GOV.UK will be updated in full.

You can sign up to receive email alerts each time a newsletter is published.

6. Lifetime allowance working group

We would like to work closely with you as we continue to work through the detail of the full abolition of the lifetime allowance and the impact on legislation and processes.

If you would like to like to join a working group, email ltaadministration@hmrc.gov.uk and put ‘lifetime allowance (LTA) working group’ in the subject heading.