HMRC has published a policy paper setting out further details of the post-abolition régime. In addition, the draft Finance Bill 2023-24 was published on 29 November 2023, the provisions of which are intended to remove the LTA completely from legislation.
The Bill replaces the LTA with two new lump sum allowances:
- a cap on the tax-free lump sum paid on retirement of £268,275 (25% of the current LTA). Pension Commencement Lump Sums and Uncrystallised Funds Pension Lump Sums will be tested against this limit;
- a new lump sum and death benefit allowance of £1,073,100 (100% 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.
Trustees will have to provide statements to scheme members, telling them how much of their allowances they have used up when relevant lump sum and lump sum death benefits are paid.
The tax-free element of a trivial commutation lump sum, winding-up lump sum or small lump sum will not be deducted from the new thresholds – but an individual must have available capacity within the thresholds to be able to take those lump sums.
Lump sum death benefits paid on a member’s death 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 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 5 April 2025.