On 15 March 2023 the Chancellor announced in the budget that the lifetime allowance (LTA) charge would be reduced to nil from 6 April 2023 and the LTA legislation abolished from 6 April 2024.
This means that anyone who draws benefits on or after 6 April 2023 will not be subject to the LTA charges detailed below and will not need to rely on HMRC protections. However, the tax-free pension commencement lump sum is being retained at £268,275 and any valid LTA protections held as of 15 March 2023 enabling a greater sum than this to be taken tax-free will still be relevant. Any lump sum in excess of this tax free amount will be subject to tax charges at your marginal rate of income tax.
Anyone who has already retired and drawn benefits before 6 April 2023 will continue to be subject to any charges.
The McCloud remedy will mean that those already retired and in scope of the remedy will have their pension tax position reassessed depending on the immediate choice they make. Those making an immediate choice which is on a different basis to that which they retired will be able to make a new choice on the lump sum taken.
The guidance below will relate to those who retired fully or partially before 6 April 2023.
Your enhanced and fixed protection will have been lost on joining. Read more below on what this means for you.
The lifetime allowance is currently £1,073,100. From 6 April 2023 no lifetime allowance charges will apply in relation to benefit crystallisation events from that date onwards. The pension commencement lump sum is being retained at 25% of this limit.
Before 6 April 2023 the lifetime allowance was the maximum amount of pension saving you can have without incurring a tax charge. This applied to your entire pension saving excluding the state pension.
The tax charge represents a clawing back of some of the tax relief which you have received during the build up of your pension benefits.
The lifetime allowance amount has changed over time and from 6 April 2023 will no longer apply.
How your lifetime allowance is calculated (pre 6 April 2023)
Your pension x 20 + lump sum = capital value
For any benefits accessed before 6 April 2023 the lifetime allowance was tested against the pension and lump sum amounts that you received:
- after any commutation of pension to provide optional lump sum
- after allocation
- after the application of actuarial reduction
- after the application of a pension debit (on divorce)
- after any deduction made for utilising the scheme pays facility
- after adding any added years or additional pension purchase.
You also needed to include any other pension benefits from other occupational or personal pension arrangements.
The state pension was not included.
When can I be charged (pre 6 April 2023)?
If your pension benefits exceeded the allowance then a tax charge applied in relation to benefits taken before 6 April 2023.
The charge was applied on the excess benefits only.
The charge was 25% if the excess was taken as scheme pension and 55% if the excess was taken as a lump sum.
Paying the lifetime allowance tax charge (pre 6 April 2023)
The charge was usually against your annual pension.
The charge was 25% on the excess of your pension. It was then divided by an age-related actuarial factor, and your NHS pension was reduced by this amount. If you were subject to such a charge which reduced your pension this reduction will continue beyond 6 April 2023 and applies to your pension for life. This may only alter if your benefits alter further to the McCloud remedy implementation which is due from October 2023.
You were not required to meet the charge before the payment of your benefits.
An example using an age-related actuarial factor of 20 of how the charge was calculated:
| Annual pension | £52,000 |
| Lump sum | £156,000 |
| Capital value | £1.196m ((20 x £52,000) + £156,000) |
| Excess fund | £122,900 (£1.0731m - £1.196m) |
| The tax charge payable | £30,725 (£122,900 X 25%) |
| Reduction to pension | £1,536.25 (£30,725/20*) |
| Reduction pension payable | £50,463.75 (£52,000 - £1,536.25) |
Taking a bigger tax-free lump sum
Commuting pension to within the maximum tax-free lump sum allowable, which is 25% of the standard lifetime allowance or your HMRC protected amount, will reduce the capital value of benefits. This could help reduce your lifetime allowance charge, even if you were unable to reduce the capital value of your benefits to within the threshold.
The maximum tax-free lump sum (Pension Commencement Lump Sum) is being retained at its current level of £268,275 (greater for those with valid protections) meaning that whilst LTA charges are removed from 6 April 2023 onwards the maximum tax free lump sum continues to be limited to this amount with any excess subject to tax at marginal income tax rates.
Read our calculating your pension lump sum guidance.
Using the figures from the example above if, instead of taking the standard benefits, you claimed the maximum tax-free lump sum based on 25% of the standard lifetime allowance you would have received an enhanced lump sum of £268,272 and a reduced pension of £42,644.
| Annual pension | £42,644 |
| Lump sum | £268,272 |
| Capital value | £1,121,152 ((20* x £42,644) + £268,272) |
| Excess fund | £48,052 (£1,121,152 - £1,073,100) |
| The tax charge payable | £12,031 (£48,052 X 25%) |
| Reduction to pension | £600.65 (£12,013/20*) |
| Reduced pension payable | £42,043.35 (£42,644 - £600.65) |
* the factor will depend on your age and the scheme you are a member of.
Taking a bigger lump sum
Commuting pension to lump sum reduced the capital value of benefits and helped reduce any exposure to the lifetime allowance charge, even if you were unable to reduce the capital value of your benefits to within the threshold.
Using the figures from the example above if, instead of taking the standard benefits, you claimed the maximum lump sum this would give an enhanced lump sum of £278,568 and a reduced pension of £41,786.
| Annual pension | £41,786 |
| Lump sum | £278,568 |
| Capital value | £1,114,288 ((20* x £41,786) + £278,568) |
| Excess fund | £41,188 (£1,114,288 - £1,073,100) |
| The tax charge payable on the excess lump sum | £5,661.15 (£10,293 (£278,568 - £268,275) X 55%)* |
| Reduced lump sum payable | £272,906.85 (£278,568 - £5,661.15) |
| A further tax charge payable on the excess pension | £7,723.75 ((£41,188 - £10,293) X 25%) |
| Reduction to pension | £386.19 (£7,723.75/20*) |
| Reduced pension payable | £41,399.81 (£41,786 - £386.19) |
*from 6 April 2023 any excess above the Pension Commencement Lump Sum will be taxed at marginal income tax rates and not 55%.
Ways to reduce your lifetime allowance tax charge (pre 6 April 2023)
- Take a bigger lump sum (as detailed above).
- Allocate part of your pension to a dependent - this reduced the amount of pension you received at retirement.
- If you had the option to retire early with actuarially reduced benefits, this reduced your capital value and therefore tax charge.
- If you divorce and are subject to a pension sharing order, the capital value was calculated after the debit has been deducted at retirement.
- If you pay an annual allowance tax charge via the scheme pays facility, the capital value is calculated after the deduction has been made.
Alternative options for pension contribution
Active members of the NHS pension scheme who are affected by the annual allowance or lifetime allowance (abolished for benefit crystallisation events from 6 April 2023 onwards) can could either:
- continue in the NHS scheme and bear any additional tax charges that arise
- opt out of the NHS scheme and be paid a separate cash payment if your employer operates a Pension Recycling scheme.
For more information on opting out of the scheme, please see our guidance on the pension contribution alternative reward policy below.
Joining the 2015 scheme and losing protections
Your HMRC protection will have been lost when you joined the 2015 NHS pension scheme if you hold:
- enhanced protection
- fixed protection 2012
- fixed protection 2014
- fixed protection 2016 (acquired before joining the 2015 scheme)
- previously held protection from the 1995 or 2008 section and joined the 2015 scheme on 1 April 2022. Anyone holding a valid protection on 15 March 2023 who joins a new scheme from 6 April 2023 will not lose this protection
- protections against the LTA for those retiring from 6 April 2023 onwards are only relevant in relation to the Pension Commencement Lump Sum which remains at £268,275 unless protection for a greater value is held.
Transitioning in April 2022
Since 31 March 2022, continued accrual in the 1995 and 2008 sections ceased for all members. Future accrual for anyone who is a member of the NHS pension scheme can only be in the 2015 scheme in relation to service from 1 April 2022 onwards.
Previous accrual remains to be calculated and paid as per the rules of the 1995 and 2008 sections. Final salary linking will continue beyond 1 April 2022 for anyone who does not have a break in pensionable service of five years or more.
Anyone who lost protection on transitioning to the 2015 scheme during the remedy period (1 April 2015 to 31 March 2022) should be able to have this restored as part of the Government’s requirement to correct the age discrimination which took place via the original transition mechanism.
More details on the process for restoring these protections is expected in regulatory form.
The LTA charge is removed from 6 April 2023 onwards and any HMRC protection for those yet to access benefits remains relevant only in relation to the pension commencement lump sum.
Retaining protections and opting out
In order to have retained enhanced or fixed protections from 1 April 2022 onwards, you needed to opt out of membership so that no accrual occurred after 1 April 2022 as this will be in the 2015 scheme.
Since the Budget announcement on 15 March 2023 any protections held on that date will not be lost if you join a pension scheme on 6 April 2023 or after.
Enhanced protection
Enhanced protection allowed for all of your pension benefits to be protected from the lifetime allowance charge. This is irrespective of the size of the pension saving at retirement providing the benefits have not increased by more than a set rate between 6 April 2006 and your retirement date. As the LTA charge is removed from 6 April 2023 this will not be tested for from that date. Anyone holding valid Enhanced Protection as at 15 March 2023 will not lose their protected tax free lump sum on joining a new scheme on 6 April 2023 or after.
For benefits accessed before 6 April 2023 the rate of growth of your benefits were subject to a test known as the RBA (relevant benefit accrual) test.
Enhanced protection may be lost if, after 5 April 2006 (and in relation to benefits accessed before 6 April 2023) you had:
- paid a contribution to a money purchase pension arrangement (personal pension plan, AVCs (additional voluntary contributions), etc
- built up further benefits in the NHS pension scheme that exceed the RBA
- built up new benefits in a defined benefit scheme (other than the NHS pension scheme) or in a cash balance pension scheme, above the RBA
- joined a new pension scheme - unless you are only transferring pension savings from one of your existing schemes into the new scheme
- start saving in a new pension arrangement (including the 2015 scheme).
- The protection afforded to the tax free lump sum will not be lost by those holding this protection on 15 March 2023 if after 6 April 2023 one of the above takes place.
Enhanced protection means the available tax free lump sum you are permitted to access is the lower of:
- 25% of £1.5 million, or
- 25% of the capital value of the benefits paid.
Read more about previous HMRC protection arrangements when the lifetime allowance threshold has been reduced.
Fixed protection
Fixed protection recognised that you may expect to have pension savings of more than the standard lifetime allowance in 2012, 2014 and 2016.
You can't give up fixed protection but from 5 April 2012 (FP 2012), 5 April 2014 (FP 2014) or 5 April 2016 (FP 2016) you will lose your protection if you:
- paid a contribution to a money purchase pension arrangement (personal pension plan, AVCs etc)
- built up further benefits in the NHS pension scheme that exceeds 'benefit accrual'
- built up new benefits in a defined benefit scheme (other than the NHS pension scheme) or in a cash balance pension scheme above benefit accrual
- join a new pension scheme - unless you are only transferring pension savings from one of your existing schemes into the new scheme start saving in a new pension arrangement (including the 2015 scheme).
- The protection afforded to the tax free lump sum will not be lost by those holding this protection on 15 March 2023 if after 6 April 2023 one of the above takes place.
You may be allowed to apply for fixed or individual protection 2016. This may be relevant for those who retired before 6 April 2023 and are in scope of the McCloud remedy and for those who wish to protect a greater Pension Commencement Lump Sum than £268,275.
Read more about previous HMRC protection arrangements when the lifetime allowance threshold has been reduced.
Benefit accrual (pre 6 April 2023)
If you had a certificate of fixed protection you were required to test for benefit accrual. This was your responsibility and the pensions agencies will not do this for you.
Benefit accrual occurred if the capital value of your benefits increase d by more than the 'relevant percentage' at any time during the tax year.
You needed to calculate the capital value of your benefits at the start of each tax year. If you had reason to believe that you had significant growth in benefits after then, you needed to test for benefit accrual. This meant that you could be testing fairly frequently during the tax year or risked a fine.
If you were automatically enrolled into the NHS pension scheme as a result of auto enrolment then you had one month to opt out again to avoid losing your protection. The same applies if you were enrolled into NEST or another alternative pension scheme. Anyone holding valid fixed protection on 15 March 2023 will not lose their protected tax free lump sum on joining a scheme after 6 April 2023.
Read more about benefit accrual at GOV.UK
Individual protection
Individual protection was first introduced in 2014. It enabled individuals who already had pension savings of more than the reduced lifetime allowance to keep that amount, but not more than the previous lifetime allowance amount.
Individual protection 2014 enabled you to retain a personal allowance of between £1.25 million and £1.5 million after 5 April 2014. Individual protection 2016 enables you to retain a personal allowance of between £1m and £1.25m. Your protected amount is based on the capital value of your benefits on either 6 April 2014 or 6 April 2016.
You can apply for individual protection 2016 if the capital value of your benefits on 5 April 2016 was more than £1 million. This may be relevant for those who retired before 6 April 2023 and are in scope of the McCloud remedy or who after 6 April 2023 need to protect a greater tax free lump sum than £268,275.
You must request a valuation of your benefits on 5 April 2016:
You must request a valuation of your benefits on 5 April 2016:
- NHS pension scheme (England and Wales)
- NHS superannuation scheme (Scotland)
- HSC pension scheme (Northern Ireland)
Apply for individual protection at HMRC