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HMRC internal manual

Pensions Tax Manual

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The lifetime allowance and the lifetime allowance charge: the lifetime allowance charge overview

Glossary PTM000001
   

 

Circumstances where a lifetime allowance charge arises 
Liability for the lifetime allowance charge 
Liability for the lifetime allowance charge where more than one BCE occurs at the same time 
Reporting the lifetime allowance charge 
Lifetime allowance excess lump sum where the two rates of lifetime allowance charge apply 
Nature of the lifetime allowance charge

Circumstances where a lifetime allowance charge arises

Sections 214, 215, 217 and 219(6) Finance Act 2004

There are two circumstances where a lifetime allowance charge arises following a benefit crystallisation event (BCE):

  • where the amount crystallising at that BCE exceeds the available amount of the individual’s lifetime allowance. A lifetime allowance charge arises on the amount that crystallises beyond the available lifetime allowance
  • where a BCE occurs and the individual has no lifetime allowance available at all (as all of the lifetime allowance has been used up by earlier BCEs). A lifetime allowance charge arises on the whole amount crystallised at that event.

The chargeable amount

The chargeable amount is the amount that crystallises for lifetime allowance purposes at a BCE that exceeds the individual’s available lifetime allowance at that point.

A lifetime allowance charge arises on this chargeable amount. The purpose of this charge is to broadly recover the tax reliefs those funds have benefited from over the years, both on the initial payments and the build-up of those funds or underlying investments over the years.

The amount crystallising at the BCE that is not covered by the available lifetime allowance is referred to as the ‘basic amount’ of the chargeable amount.

The chargeable amount is always the gross value of the benefits that exceeds the individual’s available lifetime allowance (before any tax is deducted). For certain BCEs, because the amount crystallising is based on the net value of the benefits (after any lifetime allowance charge), the amount crystallising is increased beyond the basic amount by the amount of tax paid by the scheme administrator. The legislation refers to this as a ‘scheme-funded tax payment’. This is explained in PTM085000.

Rate of lifetime allowance charge

The lifetime allowance charge is levied at one of two rates: 25 per cent or 55 per cent. Which rate applies depends on how the residual amount is to be dealt with by the scheme. This is explained in more detail below.

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Liability for the lifetime allowance charge

Liability for paying the lifetime allowance charge varies, depending on whether the charge arises during the member’s lifetime, or following the member’s death:

  • during the member’s lifetime, the scheme administrator and the member are both equally liable to the charge; the liability is ‘joint and several’. In practice the scheme administrator is obliged, as a result of its liability, to account to HMRC for the charge due after the BCE - see PTM086000
  • where the chargeable amount has arisen on payment of a relevant post-death BCE following the member’s death (crystallising through BCE 5C, BCE 5D or BCE 7), liability rests on the recipient of the payment for a BCE 7 and on the relevant dependant or nominee for a BCE 5C or a BCE 5D (although the lifetime allowance being tested here is still that of the deceased member). More guidance is in PTM087000. The process involved here is also different, and is explained in more detail at PTM088500.

The lifetime allowance charge applies regardless of whether any of the persons liable to it is resident or domiciled in the UK.

A payment of the lifetime allowance charge by the scheme is accepted as being a scheme administration member payment (see PTM143000) and thereby qualifies as an authorised payment made by a registered pension scheme.

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Liability for the lifetime allowance charge where more than one BCE occurs at the same time

Where more than one BCE occurs on the same date, (for example at a specific retirement date) the individual decides the order in which those BCEs shall be regarded as taking place for lifetime allowance purposes. Where a chargeable amount is likely to arise, the order those BCEs are considered in may affect both the rate of the lifetime allowance charge due and who accounts for that charge (i.e. from what scheme(s) the chargeable amount arises).

But where a pension commencement lump sum is paid, BCE 6 will always be viewed as occurring before the crystallisation of the connected pension (that is, before BCE 1, BCE 2 or BCE 4, as appropriate).

Whether or not simultaneous BCEs are likely to occur, either under the same or a different registered pension scheme, and the order the member wants these to be considered in for lifetime allowance purposes, is one of the things a scheme administrator will need to consider before a BCE occurs - see PTM088400.

The position is different where the payment is made after the member has died (BCE 5C or BCE 7) - see PTM088500.

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Reporting the lifetime allowance charge

The scheme administrator should report all lifetime allowance charges and other liability to tax through the Pension Schemes Online Service, using the Accounting for Tax (AFT) online return. PTM162100 gives further details on the form to use, what information must be provided on the form and when and how an amended AFT return should be made.

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Lifetime allowance excess lump sum where the two rates of lifetime allowance charge apply

Where a chargeable amount arises through BCE 6 or BCE 7, following the payment of a relevant lump sum or relevant lump sum death benefit, that amount attracts a lifetime allowance charge at the rate of 55 per cent.

The payments that may attract the 55 per cent rate are:

  • a serious ill-health lump sum - see PTM063400
  • a stand-alone lump sum - see PTM063100
  • a lifetime allowance excess lump sum - see PTM084000
  • a defined benefits lump sum death benefit - see PTM073200 or
  • certain uncrystallised funds lump sum death benefit - see PTM073300.

For the avoidance of doubt, neither a pension commencement lump sum nor an uncrystallised funds pension lump sum (see PTM063300) can give rise to a chargeable amount - apart from the two occasions set out below in the case of a pension commencement lump sum. This is because these types of lump sum can only be paid where the individual has available lifetime allowance. 

However, a lifetime allowance charge may be due on the following two types of protected lump sum if the member does not have enough available lifetime allowance to cover the whole lump sum:

  1. Protected lump sum of more than £375,000 with primary protection - see PTM063110, and
  2. Scheme specific protection of lump sums over 25 per cent - see PTM063130.

Any part of the chargeable amount crystallising, that is not derived from a lump sum payment (and so is retained within the scheme, or an overseas scheme) attracts a lifetime allowance charge at the rate of 25 per cent. These are chargeable amounts crystallising through BCE 1 to BCE 5D and BCE 8.

The lifetime allowance test and lifetime allowance charge only come into play when a BCE occurs. This is when the benefit is actually paid, becomes payable, is transferred, designated for drawdown or crystallises because the member has reached their 75th birthday.

The rate of charge will be a question of fact, depending on what event has triggered the BCE(s).

Why the two rates of charge?

The rates imposed through the lifetime allowance charge have been set broadly to nullify the earlier tax advantages associated with the build-up of the relevant excess funds or rights.

The reason for the higher rate for lump sums is that such amounts will not be taxed later, whereas other amounts will be retained by the scheme and where they are paid out later to the member, they are taxable as pension income.

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Nature of the lifetime allowance charge

The lifetime allowance charge is a charge to income tax, but the amount on which it is charged is not income under the taxation provisions generally. The charge is, broadly, a recovery of tax relief previously given, measured against the value of an individual’s tax relieved pension savings. The charge is separate from any income tax due on any pension payments actually made.

This treatment means that an individual will not be able to set any allowances, losses or reliefs against the lifetime allowance charge, and that the amount will not count as pension income, or any other kind of income, for the purposes of the UK’s bilateral double taxation conventions.