Lifetime Allowance Page

Tax Year End

 560 315 Jess Easby
By:

Tax Year End Checklist – Have you made use of your 2022/23 Allowances?

  • ISA allowance: £20,000pa
  • Junior ISA allowance: £9,000pa
  • Pension annual allowance: £40,000*pa (*or 100% of your earning and this allowance varies for higher rate tax payers and business owners.)
  • Check your carry-forward pension allowance
  • Check your pension lifetime allowance status (£1,073,100)

For more information on our tax planning services, please get in touch.

Find Your Local Adviser

Taxing Times

 560 315 Jess Easby
By:

Time for a tax health check?

With the current tax year having begun on 6 April 2022, the clock is ticking and it is important to utilise all the tax reliefs and allowances available to you before 5 April 2023 in order to minimise any potential liabilities.

Personal tax planning should be at the top of your agenda as the end of the current tax year is not too far away. Taking action now may give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions.

At the same time, you should be considering whether there are any planning opportunities that you need to consider either for this tax year or for your long-term future. We’ve listed a few reminders of the issues you may want to consider as worthy of including in your 2022/23 tax health check to-do list.

Some key things you might need to action before the tax year end

1. Personal reliefs

Married couples should consider utilising each person’s personal reliefs, as well as their starting and basic rate tax bands. Could you make gifts of income-producing assets (which must be outright and unconditional) to distribute income more evenly between you both?

2. Salary sacrifice

This is an especially tax-efficient way for you to make pension contributions, to save and reduce your Income Tax and National Insurance.
Have you considered exchanging part of your salary for payments into an approved share scheme or additional pension contributions?

3. Pensions annual allowance

Unless you are an additional rate taxpayer or have already accessed pension benefits then you are entitled to make up to £40,000 of pension contributions per tax year. Have you fully utilised your tax-efficient contributions for this tax year or any unused allowances from the three previous tax years?

4. Stakeholder pensions

A stakeholder pension is available to any United Kingdom resident under the age of 75. Children can also make annual net contributions of £2,880 per year, making the gross amount £3,600 regardless of any earnings. It is also a very beneficial way of giving children or grandchildren a helping hand for the future. Is this an option you or a family member should be utilising?

5. Large pension funds

The Pension Lifetime Allowance (LTA) is currently £1,073,100 and has been frozen at this level until the 2025/26 tax year. The maximum you can pay in is £40,000 per annum unless you pay tax at 45% in which case the annual limit could be as low as £4,000. Inflationary increases by the end of the current tax year could also have an impact on your pension funds. Do you have a plan in place to protect your money from this?

6. Pension drawdown

If your are 55 or over you could access 25% tax-free cash from your Defined Contribution (also known as Money Purchase) pension pots and invest the rest. However, drawing large amounts in one tax year can lead to a larger tax bill than if spread over a longer period. Do you know the implications of taking money out of your pension pots?

7. Passing on your pension

Usually called a ‘spousal by-pass trust’, although the recipient may not always be a spouse, this is a discretionary trust set up by the pension scheme member or pension holder to receive pension death benefits. Are your pension death benefits written in trust?

8. Individual Savings Accounts (ISAs)

An ISA allows you to save and invest tax-efficiently into a cash savings or investment account. The proceeds are shielded from Income Tax,
tax on dividends and Capital Gains Tax. The government puts a cap on how much you can put into your ISA or ISAs in any tax year (from 6 April to 5 April). The ISA allowance for 2022/23 is set at £20,000. Have you fully utilised the maximum annual allowance?

9. Junior ISAs

This is a long-term tax-efficient savings account set up by a parent or guardian, specifically for the child’s future. Only the child can access the money, and only once they turn 18. Have you invested the maximum £9,000 allowance for your child or children?

10. Lifetime ISAs (LISAs)

The Lifetime ISA (LISA) is a tax-efficient savings or investments account designed to help those aged 18 to 39 at the time of opening to buy their first home or save for retirement. The government will provide a 25% bonus on the money invested, up to a maximum of £1,000 per year. You can save up to £4,000 a year, and can continue to pay into it until you reach age 50. Could you be taking advantage of this very tax-efficient option?

11. Capital Gains Tax (CGT)

There are two different rates of CGT – one for property and one for other assets. If your assets are owned jointly with another person, you could use both of your allowances, which can effectively double the amount you can make before CGT is payable. If you are married or in a registered civil partnership, you are free to transfer assets to each other without any CGT being charged. It is currently £12,300 but will be reduced to £6,000 from 6 April 2023 and £3,000 from 6 April 2024. Have you fully used your current £12,300 annual exemption?

12. Inheritance Tax (IHT) relief

IHT must be paid on the value of any estate above £325,000, or up to £1 million for married couples including the residence nil-rate band). However, certain business assets, including some types of shares and farmland, in private trading companies can qualify for 100% relief from IHT. The government has frozen the IHT thresholds for two more years to April 2028. Are you taking advantage of the reliefs available to you?

13. Residence nil-rate band (RNRB)

This allowance was introduced during the 2017/18 tax year and is available when a main residence is passed on death to a direct descendant. The allowance is currently £175,000. When combined with the nil-rate band of £325,000, this provides a total IHT exemption of £500,000 per person, or £1 million per married couple. If you are planning to give away your home to your children or grandchildren (including adopted, foster and stepchildren) the RNRB must be claimed. There is a form for this purpose – IHT435. The form is available on the Gov.uk website. If applicable, have you applied for the RNRB?

14. Charitable and personal gifts

If you leave at least 10% of your net estate to charity a reduced inheritance rate of 36% applies rather than the usual 40%. Other exemptions apply for inter-spousal transfers, transfers of unused annual income, business and agricultural assets, and for various other fixed, small amounts. Are you intending to make gifts before the end of the current tax year?

15. Trust funds

These help protect your assets and guarantee that your loved ones have financial stability for their future. Crucially, a trust can help to avoid IHT and ensure that the majority of your money, shares and equity are passed on in the most efficient way. Should you consider setting up a trust? Future legislation could potentially result in changes to tax law, which could in turn require adjustments to your plans.

Want to talk about a tax health check?

We hope you find this checklist useful, but please bear in mind that this only provides a summary of the options available and not all options will be suitable for everyone. Therefore, for more information in respect of the ideas outlined, please contact us.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The value of your investments can go down as well as up and you may get back less than you invested. The financial conduct authority does not regulate taxation and trust advice. Trusts are a highly complex area of financial planning.

 

Find Your Local Adviser

Pension Allowance

 560 315 Jess Easby
By:

Pension Allowance

The maximum amount of contributions on which a member can claim tax relief in any tax year is greater of:

  • the ‘basic amount’ – currently £3600 gross, and
  • the amount of the individual’s relevant UK earnings that are chargeable to income tax for the year.

Lifetime Allowance

Tax Year Amount
2016/17 to 2017/18 £1,000,000
2018/19 £1,030,000
2019/20 £1,055,000
2020/21 to 2025/26 £1,073,100

Lifetime Allowance Charge: 55% on excess paid as a lump sum and 25% on excess designated for drawdown, annuity or scheme pension.

Annual Allowance

Tax Year AA Amount MPAA Amount
2016/17 £40,000* £10,000
2017/18 to 2022/23 £40,000* £4,000

Annual Allowance Charge: Marginal income tax rate on excess, subject to a minimum of 20%.

Carry forward of up to three years unused annual allowance available.

Money Purchase Annual Allowance (MPAA): applies with no carry forward to money purchase pensions once flexible pension income taken from 2015/16.

*Tapered annual allowance: from 2016/17 to 2019/20, tapered by £1 for every £2 of ‘adjusted income’ over £150,000 to a minimum of £10,000 if ‘threshold income’ is also over £110,000.

For 2020/21 to 2022/23, tapered on the same basis if adjusted income over £240,000 and threshold income over £200,000 to a minimum of £4,000.

Find Your Local Adviser

Pension Lifetime Allowance Q&A Infographic

 560 315 Jess Easby
By:

If you are a high-income earner or wealthy individual, you could be putting too much into your lifetime pension and risk exceeding the pension lifetime allowance.

Find Your Local Adviser

Pension Lifetime Allowance Q&A

 560 315 Jess Easby
By:

How to stay within the limit to avoid a tax charge.

If you’ve been diligently saving into a pension throughout your working life, you should be entitled to feel confident about your retirement.

But, unfortunately, the best savers sometimes find themselves inadvertently breaching their pension lifetime allowance (LTA) and being charged an additional tax that erodes their savings.

The following questions and answers are intended to help you avoid this tax charge.

Q: What is the lifetime allowance?

A: The LTA is a limit on the amount you can withdraw in pension benefits in your lifetime before you trigger an additional tax charge. By pension benefits, we mean money you receive from your pension in any form, whether that’s a lump sum, a flexible income, an annuity income or through any other method. This allowance applies to your total pension savings, which may be in different pensions.

Q: How much is the Lifetime Allowance?

A: In the 2021/22 tax year, the LTA is £1,073,100. This allowance has now been frozen until April 2026.

Q: What happens if you exceed the Lifetime Allowance?

A: Once you have received your full LTA in pension benefits, you will be required to pay an additional tax charge on any further benefits you receive. If you take your remaining benefits as a lump sum, you’ll pay a tax charge of 55%. If you take your remaining benefits as multiple  withdrawals, you’ll pay a tax charge of 25% on each one.

Q: How is the usage of your Lifetime Allowance measured?

A: Each time you access your pension benefits (for example, by purchasing an annuity, receiving a lump sum or establishing a flexible income), this is recorded as a ‘benefit crystallisation event’. There is an additional benefit crystallisation event when you turn 75, and finally, upon your death.

Q: Is Lifetime Allowance protection available?

A: You can only protect your pension from the LTA if your savings were worth more than £1 million on 5 April 2016. You may be able to
protect your pension savings up to £1.25 million, or up to the value of your pension on that date, depending on the type of protection you have.

Q: Is it possible to avoid the Lifetime Allowance?

A: If you do not have LTA protection and you are approaching the limit, there are various actions you can consider. These include stopping your contributions (and, instead, investing your money into an alternative tax-efficient environment), changing your investment strategy or starting retirement earlier.

Q: When should you seek professional advice?

A: The rules around the LTA are very complex and making the right decisions can feel difficult. Receiving professional financial advice will help to identify if you have a problem and offer different solutions to consider, based on a full review of your unique circumstances.

Let us help you make the most of your money – and your future

Everyone deserves a great retirement. Your goals and ambitions are unique to you and we want to help you get there. To discuss your retirement plans, please contact us. Visit our pension Lifetime Allowance page for more information.

Find Your Local Adviser

Lifetime Allowance

 560 315 Jess Easby
By:

Breach may impact on more than a million workers

An estimated 1.25 million people are set to breach the current lifetime allowance (LTA) limit of £1.055 million for pension tax relief over the course of their working life, according to new research published.

The LTA is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge. It has been cut three times since 2010, and this research estimates that around 290,000 workers already have pension rights above the limit, and well over a million more people are at risk of breaching it by the time they retire.

Facing a tax charge of up to 55% on pension savings

Those who exceed the LTA could face a tax charge of up to 55% of their pension savings above this level at the time of testing. Around 290,000 non retired people have already built up pension rights in excess of the LTA. Fewer than half of these are thought to have applied for ‘protection’ against past reductions in the LTA and so could face significant tax bills when they draw their pension. Worryingly, many may be unaware of this. Almost half of these people who are already over the LTA are continuing to add to their pension wealth, thereby storing up an even bigger tax charge with every passing year. And amongst non-retired people who are not currently over the LTA, an estimated 1.25 million can expect to breach the LTA by the time they retire.

Groups likely to breach the lifetime allowance

The two main groups likely to breach the LTA are relatively senior public sector workers with long service, whose Defined Benefit pension rights will exceed the LTA, especially as they now have to work to 65 or beyond rather than 60 as in the past, and relatively well-paid workers in a Defined Contribution pension arrangement where their employer makes a generous contribution into their pension pot.

Highest earners may be less affected by the lifetime cap

Typical salary levels of those affected are in the range £60,000–£90,000 per year. But ironically, the very highest earners may be less affected by the Lifetime Cap because they are now heavily limited by the amount they can put into a pension each year. The data suggests that only a couple of thousand people exceeded the LTA in the latest year for which figures are available (2016/17). The number likely to face a tax charge could therefore increase more than a hundredfold, purely based on those who have yet to retire but who have already exceeded the LTA.

Workers who would not regard themselves as ‘rich’

The research finds that one of the reasons why so many people will exceed the LTA is that current policy is simply to increase it each year in line with price inflation (as measured by the CPI). By contrast, wages will tend to grow faster than inflation, and the money invested in pension pots should grow faster than inflation over the long term. This means that the LTA will ‘bite’ progressively more severely over time and will affect hundreds of thousands of workers who would not regard themselves as ‘rich.’ t

Source data: [1] Research conducted for Royal London is based on detailed analysis of data on more than 7,700 workers from Wave 1 and Wave 5 of the ‘Wealth and Assets Survey’ March 2019.

Find Your Local Adviser
  • 1
  • 2