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Lifetime allowance changes for 2023/24

Published  09 January 2024
   14 min read

In the Budget on 15 March 2023, the Government announced changes to the lifetime allowance and tax-free cash. This was followed by the Finance (No.2) Act 2023 which put some of these changes into legislation from 6 April 2023.

The lifetime allowance is being abolished from 6 April 2024. The draft legislation for this is in the Finance Bill 2023/24. More information can also be found recent HMRC's newsletters.

Key facts

  • There will be no lifetime allowance charge in tax year 2023/24.
  • The lifetime allowance is being abolished from 6 April 2024.
  • A deadline of 5 April 2025 applies for those applying for fixed protection 2016 or individual protection 2016

What were the changes from 6 April 2023?

The changes from 6 April 2023 were:

  • There is no lifetime allowance charge.
  • Taxation of any lifetime allowance excess lump sum, serious ill-health lump sum, defined benefits lump sum death benefit and uncrystallised funds lump sum death benefit above the lifetime allowance changed from a 55% tax charge to taxation at an individual’s marginal rate of income tax.
  • An individual who applied for enhanced protection or fixed protection 2012, 2014 or 2016 before 15 March 2023 and had received a valid certificate/reference number can have a ‘protection cessation event’ on or after 6 April 2023 and will not lose their protection.
  • Those with enhanced protection and a registered tax-free cash percentage shown on their enhanced protection certificate will still be entitled to a higher tax-free cash but it will be based on the lower of the value of their pension fund on 5 April 2023 and the date they take their benefits.

You’ll find more detail on these changes below.

 

What has not changed this tax year (2023/24)?

The following has not changed in tax year 2023/24:

  • All existing rules for calculating pension commencement lump sums remain for tax year 2023/24.
  • Lifetime allowance checks still need to be done at benefit crystallisation events.

Further details on the changes since 6 April 2023

What are the changes to the lifetime allowance this tax year?

In tax year 2023/24, although no lifetime allowance charge will arise, providers/scheme administrators still need to continue with lifetime allowance checks and to issue benefit crystallisation event statements.

The following benefits were subject to a 55% lifetime allowance tax charge on the excess above the lifetime allowance before 6 April 2023 but for tax year 2023/24 the excess will instead be subject to income tax at the individual’s marginal rate:

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

In practice, this means if the excess over the lifetime allowance is paid as a lump sum, income tax at the individual’s marginal rate of tax is deducted from the excess and the balance paid to them. Emergency tax on a month 1 basis will apply unless the provider has a P45 in tax year 2023/24 for the individual.

If pension benefits are to be taken as income, for example as a drawdown pension, there will be no lifetime allowance charge and the income will be taxed at the individual’s marginal rate of income tax when the income is taken.

On death, calculating the lifetime allowance used by the deceased is the responsibility of the legal personal representatives. Based on the lifetime allowance information provided by the legal personal representatives, HMRC will raise a marginal rate income tax charge (instead of a lifetime allowance charge of 55%) on any portion of the defined benefits lump sum death benefit or uncrystallised funds lump sum death benefit over the lifetime allowance for any payment in tax year 2023/24.

Transferring to a qualifying recognised overseas pension scheme is a benefit crystallisation event (BCE 8). There will be no lifetime allowance charge (25% in this situation) and no UK income tax requirements on these benefits, at the time of transfer, if the individual exceeds the lifetime allowance. When they come to take their pension benefits, they will likely be taxed in the individual’s country of residence.

For clarity, when an individual reaches age 75 with uncrystallised funds and/or funds in drawdown in tax year 2023/24, there will no longer be a lifetime allowance tax charge – this could only have been 25% in these situations before 6 April 2023. The provider/scheme administrator will still need to do the lifetime allowance test and to issue benefit crystallisation statements. When the individual takes their benefits as a scheme pension, lifetime annuity and/or as drawdown they will be taxed at their marginal rate of income tax.

What are the changes to enhanced and fixed protection?

From 6 April 2023, an individual who had a valid certificate/reference number for enhanced protection or fixed protection 2012, 2014 or 2016 before 15 March 2023, can have a ‘protection cessation event’ and not lose their higher tax-free cash. Protection cessation events include:

  • contributions made to a money purchase scheme or pensions savings built up in a defined benefit scheme
  • transfers in non-permitted circumstances, or
  • setting up a new arrangement apart from to receive a permitted transfer

HMRC guidance covers protection cessation events in more detail: 

Any protection cessation event that occurred before 6 April 2023 but after the date of the protection commencement will have lost an individual their enhanced or fixed protection. For enhanced protection, the protection will have commenced on 6 April 2006; for fixed protection 2012 on 6 April 2012, for fixed protection 2014 on 6 April 2014 and for fixed protection 2016 on 6 April 2016.

Individuals who have enhanced protection with lump sum protection registered on their certificate will still be entitled to higher tax-free cash. The value of their maximum lump sum will be based on the same percentage of their benefits value at crystallisation as it was on 5 April 2006.  However, the percentage is applied to the lower of:

  • their total benefits value on 5 April 2023, or
  • their total benefit value at crystallisation

This means any contributions made on or after 6 April 2023 will not lose them their protection (if enhanced protection applied for before 15 March 2023) but will not be included when calculating their tax-free cash.

For those who have valid enhanced protection without registered tax-free cash or fixed protection 2012, 2014 or 2016 that applied before 15 March 2023, any contributions the individual makes from 6 April 2023 can be included for the purposes of calculating their tax-free cash.

It is still possible to apply for fixed and/or individual protection 2016. There are also limited circumstances where late applications for other protections (enhanced, primary, fixed protection 2012 & 2014 or individual protection 2014) can be made. See HMRC Pensions Tax Manual - PTM098000: Protection from the lifetime allowance charge: late submission of notifications for protection from the lifetime allowance charge for further details on late applications. Individuals who successfully apply for protection on or after 15 March 2023, will be entitled to a higher tax-free cash but will still be subject to the rules for protection cessation events. This means if they have a protection cessation event for example, a pension contribution is made, on or after the protection commencement date, they will lose their lifetime allowance protection.

Example 1

Arjun holds valid enhanced protection, applied for before 15 March 2023, with tax-free cash protection of 50% registered on his certificate. His pension fund was £1,850,000, on 5 April 2023.  

This means his tax-free cash is capped at £925,000 (50% of £1,850,000).

Under the new rules there is no additional tax-free cash on the benefits he accrued after 6 April 2023, assuming the value of his benefits increase after 5 April 2023.

If when Arjun came to take his pension benefits in March 2024, his fund value has decreased to £1,600,000, he will be entitled to tax-free cash of 50% of this decreased amount, £800,000.

As the value on 5 April 2023 is higher than the value at the time he takes his benefit, the protected percentage is applied to the fund at crystallisation.

Example 2

Lisa holds valid enhanced protection, applied for on 30 January 2009, with no registered lump sum protection on her certificate.

As she has no tax-free cash protection her protection will be limited to the lower of £375,000 and 25% of the value of her pension fund at the time of the benefit crystallisation event. Any contributions she has made from 6 April 2023 will be included in her tax-free cash.

Example 3

Lucas makes a successful application for fixed protection 2016 after 15 March 2023.

His tax-free cash will be the lower of £312,500 (25% of £1,250,000) or 25% of the value of his pension pot at the time of the benefit crystallisation event.

However, as Lucas applied after 15 March 2023, he must make sure he doesn’t have a protection cessation event, from 6 April 2016, or else he would lose his higher tax-free cash.

What changes are there to standalone lump sums?

Standalone lump sums are where on 5 April 2006 an individual had the right to have all of their pension benefits under a scheme paid as tax-free cash (if they have scheme specific tax-free cash) or all their pension benefits paid out as tax-free cash (if in connection with registered tax-free cash in connection with primary protection or registered tax-free cash in connection with enhanced protection).

Normally, tax-free cash must be paid in connection with a relevant pension (scheme pension, lifetime annuity or drawdown) but a standalone lump sum allows an individual to take benefits without a pension, subject to certain conditions.

Since 6 April 2023, the amount able to be paid as a tax-free standalone lump sum has been limited to the value of the standalone lump sum at 5 April 2023. Any amount over the value at 5 April 2023 will still be able to be paid as a standalone lump sum but it will be taxed at the individual's marginal rate of income tax. 

A frequently asked question

A. It’s only the lifetime allowance charge that has been abolished this tax year. The lifetime allowance still exists, and providers still have to do lifetime allowance checks this tax year.

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.