Q&A: High-Net-Worth lifetime allowance tax quirk
Personal Tax » August 15, 2024
We will be publishing some of the most frequent questions we have received and our answers to them. Please note we have changed some parts of the questions to protect client’s information. You should always seek professional tax advice before taking any action.
Question
Now that the lifetime allowance has been abolished do I need to consider tax on pensions in financial remedy proceedings?
Answers
You’re correct that the lifetime allowance tax charge has been abolished from 6 April 2024. This means that there is no longer a 55% tax charge for pensions accessed when total pensions exceed £1,073,000. However there is one small quirk to be aware of & it impacts the 25% tax free cash rules.
People can access up to 25% of their pension tax free. The remaining pension will be taxed at the relevant income tax rates. If a person’s total pension is over £1,073,000 the 25% tax free will be capped at 25% of £1.073m being £268,275.
Therefore an individual with say £4m in their pension could not access £1m tax free but rather just £268k.
Note that those with transitional protections may have a higher lump sum allowance and where benefits have been taken before 6 April 2024 this will usually reduce the available lump sum allowance.
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