As the end of the 2023/24 tax year approaches, it’s important to be aware of some upcoming changes taking place from 6 April 2024.

Here’s a quick heads-up about some of the key changes on the way.

Removal of the lifetime allowance (LTA)

As announced in the Spring Budget 2023, the LTA is being removed from 6 April 2024. This will be replaced by three new allowances:

1. Lump sum allowance – normally £268,275* – broadly, the total amount of tax-free lump sums a client can receive during their lifetime.
2. Lump sum and death benefit allowance – normally £1,073,100* – broadly, the total amount of the tax-free lump sums mentioned above plus any tax-free lump sum death benefit payments.
3. Overseas transfer allowance – normally £1,073,100* – broadly, the amount you can transfer into a qualifying recognised overseas pension scheme (QROPS) without incurring an additional tax charge.

* The normal lump sum allowance of £268,275 is 25% of the current standard LTA of £1,073,100. These amounts will be different if the client has any form of LTA protection and/or if they crystallised any benefits before 6 April 2024.

Relevant Benefit Crystallisation Events (RBCEs) from 6 April 2024

From 6 April 2024, new tests need to be performed at any ‘relevant benefit crystallisation event’ (RBCE).  This occurs when benefits are crystallised and a lump sum is paid to the client during their lifetime, or to another recipient following the client’s death. The lump sum amount crystallised is tested against one, or more, of the client’s remaining available allowances, as set out above.

Rather than using up a percentage of the client’s LTA in relation to all of a client’s crystallised benefits, the new basis will only test lump sum payments against one, or more, of the client’s remaining allowances as a monetary amount.

Transition calculations (for those who started taking pension benefits before 6 April 2024)

If a client has crystallised any benefits before 6 April 2024, or they had pensions in payment before 6 April 2006 but they haven’t crystallised any benefits (after 5 April 2006 and before 6 April 2024), their crystallisations and/or pensions in payment will be taken into account at their first RBCE after 5 April 2024. There are two transitional calculation methods which can be used to do this.

The standard (default) method will apply for most clients, as follows:

Lump sum allowance

The client’s (personal) lump sum allowance would be reduced by 25% of the LTA they used before 6 April 2024.  For example, if a client without any form of lifetime allowance protection used 60% of their LTA before 6 April 2024, their personal lifetime allowance at their first RBCE after 5 April 2024 would be reduced to reflect that. The reduction would be 25% x (60% x £1,073,100) = £160,965.50.  Therefore, their personal lump sum amount would be £268,275 minus £160,965.50 = £107,310.

Lump sum and death benefit allowance

The client’s personal lump sum and death benefit allowance would be reduced to take account of both any lump sum(s) paid to a client during their lifetime and any lump sum death benefits paid following their death.  The precise calculation depends on whether the client received any serious ill-health lump sum payment(s),and/or whether any lump sum death benefit(s) had been paid.

Transitional tax-free amount certificate (TTFAC)

The standard (default) method mentioned above makes certain assumptions.  For instance, it assumes that everyone who has crystallised any benefits before 6 April 2024 took 25% of those benefits as a tax-free lump sum and it does not take account of any crystallisations (for clients without any form of lifetime allowance protection) that occurred when the standard LTA was less than £1,073,100.  

Therefore, as the standard transitional method would not benefit everyone, a client can apply to any of their registered pension schemes for a TTFAC.  This will calculate their lump sum allowance and lump sum death benefit allowance using the client’s personal circumstances.

We’ll be providing more details about how your clients can apply for these certificates soon. In the meantime, it’s important to know that:

1. Clients can only apply for a TTFAC from 6 April 2024
2. Clients who wish to obtain a TTFAC must do so before their first RBCE after 5 April 2024. For this reason, any clients who  currently crystallises each month via drip feed drawdown, or wishes to receive a pension commencement lump sum (PCLS) or uncrystallised funds pension lump sum (UFPLS) early in the 2024/25 tax year, may need to suspend, or defer, receipt of those lump sum until they have obtained their TTFAC, or forfeit the TTFAC option.
3. To apply for a TTFAC, a client would need to provide a complete history and evidence of each of their crystallisations before 6 April 2024.
4. Once a TTFAC has been issued, the figures shown on it must be used to determine a client’s lump sum allowance and lump sum and death benefit allowance (even if they are lower than the figures produced by the standard method).

Exceeding the allowances

The lifetime allowance charge was removed at the start of the 2023/24 tax year. Therefore, anyone who crystallises above their previous personal LTA limit in the 2023/24 tax year will not incur a lifetime allowance charge.  Any benefit amount which is not tax-free will be taxed at the recipient’s marginal income tax rate(s).

From 6 April 2024, any lump sum(s) taken which exceed(s) one, or more, of the client’s available allowances would also be taxed at the recipient’s marginal income tax rate(s).

ISA changes (from 6 April 2024)

We’re aware of the upcoming changes to ISAs taking place from 6 April 2024, including multiple subscriptions and partial transfers from current year subscriptions. We’re currently awaiting further guidance from HMRC before we can comment further on the changes.

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Disclaimer:

All of the above is presented for general consideration only and no action must be taken or refrained from based on the content of this article alone. Each case depends on its own facts and advice is essential. Accordingly neither Wealthtime nor any of its officers or employees can accept any responsibility for any loss occasioned as a result of any such action or inaction.