Following confirmation in the Autumn Statement that the Government will legislate to abolish the LTA from April 6, 2024, HMRC has published a policy paper setting out further details. The paper summarises the Government's proposals, reflecting the draft legislation published in July 2023. In addition, the draft Finance Bill 2023-24 was published on November 29, 2023.
With the LTA abolition having been announced in the March 2023 Budget, the LTA charge has not applied since April 6, 2023. The draft Finance Bill provisions are intended to remove the LTA completely from legislation.
The Bill replaces the LTA with two new lump sum allowances.
- A new lump sum and death benefit allowance of £1,073,100 (the level of the current LTA) applies to tax free lump sums and lump sum death benefits payable to or in respect of a member. Lump sums over the allowance will be taxed at the recipient's marginal rate.
- A cap on the tax-free lump sum paid on retirement of £268,275 (25 per cent of the current LTA). Pension commencement lump sums and uncrystallised funds pension lump sums will be tested against this limit.
Trustees will be required to provide statements to individuals telling them how much of their allowances are used up when relevant lump sum and lump sum death benefits are paid.
The further changes below are also made.
- The tax-free element of a trivial commutation lump sum, winding-up lump sum and small lump sum will not be deducted from the new thresholds in the Bill but an individual must have available capacity within the thresholds to be able to take those lump sums.
- Payment of lump sum death benefits where a member dies under age 75 will remain tax-free up to the deceased member's tax-free limit, with the excess taxed at the beneficiary's marginal rate.
- Individuals with the former LTA protections will have higher allowances which remain frozen at their current rates. New applications for Individual Protection and Fixed Protection 2016 must be made before April 5, 2025.
The above changes are confirmed in HMRC's latest Newsletter 154.
In the July 2023 draft of the legislation, there was what has now been identified as an unintentional extension of the pension flexibilities to DB schemes, which would have allowed DB members to take most of their benefits as a taxable lump sum. This drafting defect has been addressed in the amended draft Bill.
Where an individual has taken benefits before April 6, 2024,
there will be a transitional calculation method to establish how
much of the new allowances have been used up.
The necessary changes to existing legislation are likely to be
complex and the Treasury will have power for the next two years to
make any necessary changes to primary legislation via
regulations.
There is no indication of whether there will be legislative overrides to help schemes with LTA provisions hard-coded into their rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.