LTA excess

As the pension lifetime allowance (LTA) has reduced over the years there are more and more individuals affected by the LTA excess charges.

The LTA is the maximum amount an individual can crystallise without potentially being subject to a tax charge. The level is currently £1,073,100 (although the government have announced they will be removing the lifetime allowance from the 2024/25 tax year). As the LTA has varied over the years it has been possible for members to apply to protect their personal LTA at different times.

The LTA excess charge

Any money crystallised above the lifetime allowance does not benefit from having 25% tax free. Instead 100% of the excess will either be designated to drawdown, converted to a scheme pension, used to buy an annuity or paid out as a lump sum.

If designation to drawdown, taking a scheme pension or buying an annuity, there is no charge because any money taken from drawdown or paid as an annuity is subject to income tax. 

Any excess paid out as a lump will be taxed at marginal rate income tax.

The scheme administrator and the member are jointly liable for the LTA excess charge

It would be unusual for the administrator to leave the charge to be paid by the client and they will offer to make the payment from the pension funds. This is seen as a scheme administration member payment and is deemed an authorised payment.

This payment needs to be reported to HMRC and this would be done through PAYE by the scheme administrator.

The payment rules on LTA excess on death are different and covered below.

Taking the benefits and the charge

Not all schemes will allow the LTA excess to be taken as a lump sum. This generally occurs in final salary schemes in which case any LTA excess would be only available as continued income.
If the member has more than 1 benefit crystallisation event (BCE) occurring they can decide the order in which these events take place. This will determine which event may be liable for the excess tax charge. The exception to this is when tax-free cash is being taken (BCE6). In this circumstance the tax free cash is always deemed to be the first event to occur.

It is possible for the member to have any excess treated in different ways so that some of the excess is taken as a lump sum and some is taken as continued income payments. This does not change the reporting requirements. Again, this would need to be checked with the pension provider to see if they allow for split options to be made.

There are certain BCEs which, by their nature, will only allow for one type of charge to be applied. For example, a stand-alone lump sum or serious ill health lump sum can only be paid as a lump sum so will have marginal rate tax deducted.

Wrong amount taken

The scheme administrator is largely dependent on the member to provide and certify their available LTA. If this is incorrect there could be either too much or too little of an LTA charge taken.

The scheme administrator may feel they have been given the incorrect information when making the charge and do not have enough funds (if any) to rectify the situation. The scheme administrator can apply to HMRC to be discharged from their liability to the charge on the grounds that it would not be just or reasonable for them to be liable for it. This application must be in writing, and no later than five years after 31st January next following the year of assessment. If HMRC pick up the error the deadline for application is 2 years from the assessment date.

Excess charge taken and refunded

If the member has incorrectly given LTA details or suffered an LTA excess, their LTA statement can be amended to show they have scope. If this is in respect of a pre 6th April 2023 event, then once in receipt of this the scheme administrator can submit the amendment via the Accounting for Tax system to HMRC. HMRC can make a repayment to the scheme administrator. A repayment carries repayment interest from the later of the due date or the date of payment. If it is post 6th April 2023, the individual will need to reclaim the overpaid tax from HMRC.

LTA excess charge on death is paid by the beneficiaries

Generally, all LTA excess charges will be paid by scheme administrators as they hold a joint liability. The exception is for any LTA excess charge calculated on death.

On death the calculation for any lifetime allowance excess lies with the personal representatives to carry out. This will be done after any lump sum or dependants/beneficiaries' drawdown is set up and paid by the administrators. The administrators will make the payment out to the relevant recipient of the death benefit without deduction of any LTA excess charge. The scheme administrator would provide the personal representatives with the amount, the payment date and the percentage of the LTA used within 3 months of any designation or payment being made to beneficiaries.

Where the personal representatives identify a chargeable amount, they must report this to HMRC, who then assesses the recipient for the amount to pay. The notification to HMRC must be within the later of 13 months of the date of death or within 30 days of any payment being made.

In all cases the LTA excess tax charges are the same as during the member’s lifetime. As the payment would have already happened by the time the assessment for tax is made the nature of tax will have been identified. So, BCE 7 (lump sum death benefits) will only ever have a marginal rate tax charge attached while BCE 5c and 5d (dependants/beneficiary drawdown and annuity respectively) will not have a tax charge.

Where the deceased left benefits subject to an LTA excess charge, HMRC will apply the charge proportionately to the beneficiaries receiving the excess monies. So, for example, where there are 2 schemes on death both triggering an LTA excess charge and 3 beneficiaries, the excess charge will be split to mirror the proportion of the benefits each beneficiary received (and match the tax charge to the type of benefit: lump sum or income).