HMRC lump sum allowances from 6 April 2024
In the Spring Budget 2023, the government announced the removal of the lifetime allowance charge from 6 April 2023 and the lifetime allowance from 6 April 2024.
The Finance Act 2024 made changes to the Finance Act 2004, the Income Tax (Earnings and Pensions) Act 2003 and other HMRC legislation. The lifetime allowance has been replaced with 3 HMRC lump sum allowances from 6 April 2024.
The allowances are:
- lump sum allowance
- lump sum and death benefit allowance
- overseas transfer allowance
Since 6 April 2024, relevant lump sum payments must be checked and assessed against one or more of these allowances when a relevant benefit crystallisation event (RBCE) occurs. Any lump sum paid in excess of the allowance limits is chargeable.
Relevant benefit crystallisation event (RBCE)
A relevant benefit crystallisation event (RBCE) occurs when a tax-free relevant lump sum is paid after 5 April 2024. This happens when you:
- retire
- die
- transfer your pension rights overseas
At each RBCE, the relevant lump sum payment is checked against one or more of these allowances.
Lump sum allowance (LSA)
A relevant lump sum payable from the NHS Pension Scheme for the lump sum allowance is a pension commencement lump sum. This is also known as a retirement lump sum.
Lump sum and death benefit allowance (LSDBA)
A relevant lump sum payable from the NHS Pension Scheme for the lump sum and death benefit allowance is a:
- pension commencement lump sum, also called a retirement lump sum
- serious ill health lump sum
- defined benefit lump sum death benefit, also called a lump sum on death
The payment of NHS Pension Scheme benefits as a trivial commutation lump sum or small lump sum payment does not use up any of these allowances.
Overseas transfer allowance (OTA)
The overseas transfer allowance (OTA) applies when the transfer value is paid to an overseas pension scheme.
The lump sum allowance (LSA)
If you have a relevant benefit crystallisation event (RBCE) after 5 April 2024, you're entitled to a lump sum allowance (LSA) of £268,275 unless you have either:
- HMRC protection that gives you a protected right to a higher LSA
- certain pension benefits that were already in payment before 6 April 2024, which reduces your LSA
Your available LSA may be either:
- higher than the standard LSA of £268,275 if you have previous lifetime allowance protection
- lower than the standard amount if you have previously crystallised and used some or all of the lifetime allowance
If some or all of the lump sum to be paid is more than your available LSA, the excess amount is taxed at your marginal rate of income tax, as confirmed by HMRC.
You, or your legal personal representative, will be told how much of the LSA has been used by the relevant lump sum.
The lump sum and death benefit allowance (LSDBA)
This allowance also includes any payment of a serious ill-health lump sum.
If you have a relevant benefit crystallisation event (RBCE) after 5 April 2024, you're entitled to a lump sum and death benefit allowance (LSDBA) of £1,073,100 unless you have either:
- HMRC protection that gives you a protected right to a higher LSDBA
- certain pension benefits that were already in payment before 6 April 2024, which reduce your LSDBA
Your available LSDBA may be either:
- higher than the standard LSDBA of £1,073,100 if you have previous lifetime allowance protection
- lower than the standard amount if you have previously crystallised and used some or all of the lifetime allowance
If some or all of your lump sum to be paid is more than your available LSDBA, the excess amount is subject to a tax charge.
You, or your legal personal representative, will be told how much of the LSDBA has been used by the relevant lump sum.
Benefit crystallisation event (BCE) before 6 April 2024
If you've been paid a tax-free lump sum that qualified as a benefit crystallisation event (BCE) before 6 April 2024, the amount of LSA and LSDBA that is available to you will be adjusted to take account of one or more previous lump sum payments.
How the allowances are adjusted depends on whether you have a transitional tax-free amount certificate TTFAC.
Transitional tax-free amount certificate (TTFAC)
If you were paid a tax-free lump sum payment before 6 April 2024 which did not represent 25% of the capital value of your benefits paid, and you can provide evidence of this, you may wish to apply for a TTFAC.
The certificate shows:
- your previously used lifetime allowance amount expressed as a percentage of the standard lifetime allowance
- your lump sum transitional tax-free amount
- your lump sum and death benefit transitional tax-free amount
The certificate can then be used to work out your LSA and LSDBA when you're paid a relevant lump sum and have a relevant benefit crystallisation event (RBCE).
Applying for a certificate
You, or your personal representative, do not have to apply to the NHS Pension Scheme for a certificate. You can apply to any registered pension scheme that you are a member of. You may wish to apply to the pension scheme that:
- you expect to have your first RBCE with
- paid most of your pension benefits before 6 April 2024
You cannot apply if you’ve had an RBCE after 5 April 2024. If you do apply, the certificate must be issued before the date of your first RBCE.
Evidence you must provide
If you apply, you must include what HMRC calls complete evidence. Complete evidence must show the total percentage of lifetime allowance used in all your BCEs before 6 April 2024. The scheme administrator uses this to work out the portion of the pension benefits that were taken as tax-free lump sums.
When the scheme administrator assesses your application, they'll decide if your evidence is sufficient for a certificate to be issued. If they decide that you have not provided complete evidence, your application will be refused.
If your application is refused
If your application is refused because of insufficient evidence, you can apply again. However, you must provide complete evidence for an application to be reconsidered and be successful.
You can make a new application following a refusal if you have not had a relevant benefit crystallisation event (RBCE). If you confirm that you’ve already had an RBCE, your TTFAC application will be refused and you will not be allowed to reapply.
If you're making an application for a certificate to another pension scheme and require information about your NHS Pension Scheme lump sum to allow you to provide complete evidence to another scheme administrator, submit an ’Application for information for a transitional tax-free amount certificate’.
If you're applying to NHS Pensions
If you want to apply to NHS Pensions for a TTFAC, you need to complete the Application for a transitional tax-free amount certificate (PDF: 303KB) and provide complete evidence. Send your completed application form to [email protected] or write to NHS Pensions at:
PO Box 683
Unit 5
Newcastle-upon-Tyne
NE5 9EE
HMRC has a tool to help you check if you can apply for a TTFAC. This can be found at https://www.tax.service.gov.uk/guidance/Check-if-you-can-apply-for-a-Transitional-tax-free-amount-certificate/start.
The application form also has questions to help you decide if a TTFAC is needed.
Not all members will benefit from a TTFAC. It is your responsibility to check if the certificate is suitable for your circumstances.
Standard transitional calculation
If you had a benefit crystallisation event (BCE) before 6 April 2024, and you do not have a transitional tax-free amount certificate (TTFAC) or you're not able to apply for a certificate, at your RBCE your available LSA and LSDBA will be calculated using HMRC’s standard transitional calculation. This takes account of your benefits already paid, using HMRC's standard transitional calculation.
How the standard transitional calculation works
The standard transitional calculation looks at:
- the amount of lifetime allowance you used from all your BCEs
- any pensions you took before 6 April 2006
From this, 25% of the total standard or protected lifetime allowance used is deducted from both the LSA and LSDBA. If you've received a serious ill-health lump sum or a lump sum death benefit, all of the lifetime allowance used is deducted from the LSDBA.
If you used 100% or more of the lifetime allowance before 6 April 2024, your available LSA and LSDBA would both be considered as zero.
Overseas transfer allowance (OTA)
If you transfer your pension rights to an overseas scheme after 5 April 2024, which HMRC calls a ‘qualifying recognised overseas pension scheme’, or QROPS, you're entitled to an overseas transfer allowance (OTA) of £1,073,100, unless you have HMRC protection that gives you a higher allowance.
Your available OTA is reduced but not below zero by the transferred value of a:
- recognised transfer from a registered pension scheme to a QROPS
- transfer of UK tax-relieved funds from a relieved relevant non-UK scheme (RNUKS) to a QROPS, where that transfer is not a block transfer
- onward transfer of funds in relation to which the original transfer was a block transfer from a RNUKS) before 6 April 2024
When a charge applies
If your overseas transfer value is higher than your available OTA, the excess amount is subject to a 25% overseas transfer charge.
More information about transferring your NHS Pension Scheme rights is available in 'Leaving or taking a break from the scheme’.
Previous HMRC lifetime allowance protection
If you have one of HMRC’s lifetime allowance protections, the 3 lump sum allowances may be higher.
You can read more about the effects of HMRC’s protection in the Pensions Tax Manual.
Where to find more information and guidance from HMRC
You can find more information about HMRC’s new lump sum allowances, the transitional tax-free amount certificate (TTFAC), and the standard transitional calculation on page PTM170001 of HMRC’s Pensions Tax Manual.
We encourage anyone who is concerned about their pension tax position, particularly following the introduction of these allowances, to seek independent financial advice from an authorised accountant or Independent Financial Advisor who specialises in pension benefits and tax.