Initial guidance on Lifetime Allowance Pensions being withdrawn...
HMRC has issued preliminary guidance on how the abolition of the lifetime allowance for pensions will be phased in as legislation will not be passed until 2024
As announced at the Budget the removal of the £1,073,100 limit on pension savings will take effect from 6 April 2023, but it will not be possible to use the benefit until the 2024/25 tax year, according to the guidance from HMRC as the legislation will not be included in the current Finance Bill.
Detailed guidance will be published on 6 April once the allowance change comes into effect. The guidance contains a series of examples of how the change will affect different taxpayers, particularly those with enhanced protection.
HMRC states that pension scheme administrators ‘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 a 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).’
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.
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.
Any contributions made on or after 6 April 2023 will not be included for the purposes of calculating their pension commencement lump sum.
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.
In certain circumstances, some lump sum payments would currently be subject to a lifetime allowance charge at 55%.
From 6 April 2023, this approach will be replaced with income tax at the recipient’s marginal rate, including serious ill-health lump sum, lifetime allowance excess lump sum, uncrystallised funds lump sum death benefit, and defined benefits lump sum death benefit.
This means that these lump sum payments will be taxed under the normal PAYE rules and they will be treated as pension income.
This will require updating of PAYE software and HMRC has confirmed that employers will have until 30 September 2023 to update payroll systems.
The lifetime allowance will be fully abolished from the 2024/25 tax year, through a future Finance Bill.
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