HMRC shares further guidance on LTA changes, but 'unanswered questions' remain

HMRC has shared further guidance on key issues surrounding the removal of the lifetime allowance (LTA), although industry experts have warned that there are still unanswered questions, with further clarity needed.

The government previously announced plans to scrap the LTA in its 2023 Spring Budget, in an effort to help ensure that high skilled individuals such as NHS clinicians are not disincentivised from remaining in the workforce.

Industry experts have since argued that there is a lot to do before the latest pensions tax changes reach their ultimate destination on 6 April, with research suggesting that uncertainty remains around the changes.

However, HMRC’s latest update included a number of frequently asked questions, covering issues such as lump sums and lump sum death benefits, reporting requirements, overseas transfer allowances and transitional arrangements.

In addition to this, it also provided further clarification on the application of transitional tax-free amount certificates, confirming that the majority of members should not need to apply for a transitional tax-free amount certificate.

HMRC's updated acknowledged industry concerns that a higher volume of members than expected will apply for these certificates, clarifying however, that this process should only be followed by members who have used less of their available lifetime allowance as tax-free lump sums than under the standard calculation.

It also confirmed that it will publish guidance for members following Royal Assent of the Finance Bill 2023-24, rather than from 6 April 2024.

"Providing members with the opportunity to apply for transitional tax-free amount certificates is however necessary to ensure that they are not put in a worse tax position due to the standard transitional arrangements," HMRC stated.

"Although no one will be put in a worse tax position by the standard transitional arrangements than they would have been under the lifetime allowance system."

HMRC also clarified that members should not apply for a transitional tax-free amount certificate where they believe that this might result in lower available allowances than under the standard transitional calculation.

This is because the legislation does not allow for members to apply in order to compare the results under each process, meaning that there is no opportunity to revert to the standard calculation once a transitional tax-free certificate has been granted.

Queries have also been raised on the changes to PAYE regulations and what pension scheme administrators now need to report via Real Time Information (RTI).

HMRC therefore confirmed that there will be changes to PAYE regulations, which will require pension scheme administrators to report any relevant lump sum which is subject to tax, in whole or in part, through RTI.

The changes will also make it mandatory to report the taxable and non-taxable elements of any lump sums reported.

However, HMRC said that, until further notice, administrators should continue to follow the guidance published as part of the Lifetime allowance guidance newsletter — March 2023.

Systems changes are instead expected to be ready for April 2025, with further guidance on the PAYE changes and RTI reporting to be shared in future newsletters.

HMRC will also be sharing further guidance on the changes to enhanced protection, the operation of lump sum and death benefit allowance enhancement factors, and the impact of stand-alone lump sums and lump sums taken under scheme-specific lump sum protection on an individual’s allowances.

Royal London pensions expert, Clare Moffat, said that, with less than two months to go until the removal of the lifetime allowance, the latest update is a welcome clarification on the rules for those responsible for advising clients.

“This is especially true in relation to transitional tax-free amount certificates, which we receive the most queries about, along with questions on the implications of the changes on those who have already taken benefits but who will take more after 6 April,” she added.

“However, there are still unanswered questions. HMRC state that more information will follow in the coming weeks in future newsletters and guidance. We look forward to seeing that clarity to ensure advisers can give their clients appropriate advice.”

The next pension scheme newsletter is due to be published the week commencing 19 February.

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