If you’ve ever worried about exceeding the Lifetime Allowance (LTA) on your pension savings and thereby incurring an extra tax, you can breathe a sigh of relief.
As of 6 April 2023, the LTA Tax Charge has been abolished, drastically altering the landscape of UK pensions.
What was the LTA?
The LTA was a cap on the amount of pension savings one could accumulate without being subject to an additional tax charge.
For the tax year 2022/23, this cap was set at £1.073 million.
If you surpassed this threshold, you’d pay an extra tax known as the LTA Tax Charge when you started drawing your benefits.
Recent legislative changes
From April 2023, this extra charge is no longer a problem for those exceeding the threshold.
Pension benefits exceeding the LTA will now be taxed at your marginal income tax rate, just like any other pension benefits you might receive.
Furthermore, the Chancellor has expressed plans to abolish the LTA framework altogether by the 2024/25 tax year, although the details remain unconfirmed.
How does this affect you?
If you’ve meticulously planned your pension contributions to avoid the LTA Tax Charge, you can now consider being a bit more liberal with your investments.
However, it’s worth noting that the maximum tax-free lump sum you can withdraw upon commencement of your pension hasn’t changed – it remains at £268,275.
Do LTA protections remain relevant?
For those who have previously sought special LTA protections from HM Revenue & Customs, these will still matter.
While they’re no longer needed to shield against the LTA Tax Charge, they do provide a higher cap on tax-free cash you can withdraw.
If you applied for and retained valid LTA protection as of 6 April 2023, you’ll keep your entitlement to a higher tax-free cash amount.
The abolition of the LTA Tax Charge offers more flexibility and potentially greater income in retirement.
Still, caution is advised until the complete details of the proposed changes are made clear.