HMRC shares further guidance on LTA changes

HMRC has shared new guidance on the lifetime allowance (LTA) changes, following the news that the LTA will be fully abolished from the 2024 to 2025 tax year, also announcing plans for an LTA working group.

Chancellor, Jeremy Hunt, previously confirmed plans to abolish the allowance as part of the Spring Budget 2023, revealing that the LTA charge would be removed from 6 April 2023.

HMRC has now shared further guidance on the changes, confirming that pension scheme administrators will need to continue to operate LTA checks when paying benefits, for example assessing whether an individual has available LTA, and to issue benefit crystallisation event statements.

For any benefit crystallisation event occurring before 6 April 2023 all current rules apply, including the LTA charge, and any LTA charges that arise between 1 April 2023 and 6 April 2023, must be reported as normal on the Accounting for Tax Return for the quarter ended 30 June 2023.

However, HMRC clarified that, following the standard LTA checks, for benefit crystallisation event occurring after 6 April 2023 no LTA charge will arise and there will be no requirement to report LTA charges on the Accounting for Tax Return.

Alongside this, HMRC confirmed that all existing rules for calculating a pension commencement lump sum will remain for the 2023 to 2024 tax year, alongside a number of example cases on pension commencement lump sum and LTA protections.

As previously confirmed, members who hold a valid enhanced protection or any valid fixed protections, will also be able to accrue new pension benefits, join new arrangements or transfer without losing this protection, provided this was applied for before 15 March 2023, and a certificate or reference number subsequently issued, from 6 April 2023.

In addition to this, HMRC revealed that whilst certain payments, such as a defined benefits (DB) lump sum death benefit, would currently be subject to an LTA charge at 55 per cent, from 6 April 2023, this will be replaced with income tax at the recipient’s marginal rate.

This means that from 6 April 2023, when operating the LTA checks on a member, where administrators identify one of these lump sums, normal PAYE rules will apply to these payments, and they will be treated as pension income.

HMRC also flagged specific changes in the process for uncrystallised funds lump sum death benefit and DB lump sum death benefit.

In particular, HMRC confirmed that, from 6 April 2023, when processing these cases, pension scheme administrators will need to first contact the legal personal representative of the deceased member to find out how much available LTA the member has, confirming that this process will need to be repeated for each lump sum payment in respect of the deceased member.

This means that where a scheme pay benefits to a beneficiary, which would currently be subject to an LTA charge because there is an excess over the LTA, scheme administrators will need to deduct tax at the marginal rate.

HMRC also confirmed that some changes will be needed to update employers payroll systems to allow them to report and any lump sum amounts above the LTA, confirming that this should be done "as soon as possible and by no later than 30 September 2023".

More broadly, HMRC emphasised that it wants to work "closely" with the industry it continues to work through the detail of the full abolition of the LTA and the impact on legislation and processes, inviting those interested to join an LTA working group.

Further guidance for members is also expected to be shared on 6 April 2023.

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