Changes to the lifetime allowance
On 15 March 2023, the Chancellor of the Exchequer announced in in his Spring Budget statement that the lifetime allowance will be removed from 6 April 2023 and will be abolished entirely from April 2024.
The former lifetime allowance explained
Prior to 6 April 2023, lifetime allowance was the amount of pension savings an individual could make over a working lifetime without paying tax. All pension benefits, except the state pension, counted towards the lifetime allowance.
This included pension benefits in the NHS Pension Scheme, other workplace pension schemes and personal pension arrangements. If an individual’s total pension savings exceeded the lifetime allowance, a tax charge was due on the excess benefits.
The lifetime allowance was set at £1,073,100 but was removed from 6 April 2023.
The former lifetime allowance charge
An individual that was presented with a lifetime allowance tax charge was not expected to meet this charge until they were paid their benefits in retirement.
The rate of tax payable on any excess benefits above lifetime allowance depended on how the member received the benefits.
- Benefits taken as a cash lump sum were taxed at a rate of 55 per cent.
- Benefits that are paid as a pension were taxed at a rate of 25 per cent.
NHS Pensions deducted the lifetime allowance tax charge from the member’s pension before it was paid. Regular pension payments in retirement will continue to be taxed according to the individual’s marginal rate of income tax. Therefore, for higher rate tax payers, both the options above were broadly equivalent.
How benefits in the NHS Pension Scheme were tested against lifetime allowance
The value of the member’s annual pension at retirement was multiplied by a factor of 20.
The value of any automatic additional cash lump sum (for members of the 1995 Section only) was added.
The value of any additional voluntary contributions (AVCs) was added.
Individuals needed to add the value of any other pension benefits from other pension schemes in this calculation.
Prior to 6 April 2023, if the total pension savings exceeded the lifetime allowance, any excess benefits would have been subject to a tax charge.
Those likely to have been affected
A range of factors may have contributed towards an NHS Pension Scheme member exceeding the lifetime allowance. Members were more likely to breach the lifetime allowance if they retired prior to 6 April 2023 and had:
- a high income
- long service in the 1995 Section and were active members of the 2015 Scheme
- pension benefits in other schemes.
For members retiring prior to 6 April 2023, pension benefits were measured against the lifetime allowance at retirement. At the point of retirement, NHS Pensions confirmed if the member had exceeded the lifetime allowance and if a tax charge was due.
Information about annual allowance
Annual allowance is the amount of pension savings an individual can make in one year without paying tax. If an employee builds up pension savings that exceed the annual allowance, a tax charge is due on the value of the excess benefits.
From 6 April 2023, the annual allowance was increased from £40,000 to £60,000, and the adjusted income threshold for the tapered annual allowance was increased from £240,000 to £260,000.
Visit our web page for more information on the annual allowance and how to support members of the NHS Pension Scheme that are likely to be affected by it.