What is the LTA?
Every individual has a set level of benefits which they can draw from all registered pension schemes in their lifetime without certain tax charges applying. This is known as the LTA. When a member becomes entitled to benefits from a registered pension scheme, they will use up a percentage of their LTA. Any benefits above the LTA will be subject to a tax charge, known as a 'Lifetime Allowance charge'. The current LTA is £1,073,100 until the end of the 2023/24 tax year. The 2023 Spring budget removed the tax charges for amounts exceeding the Lifetime Allowance for the 2023/24 tax year, and it is likely the Lifetime Allowance will be abolished completely from 6 April 2024.
Exceeding the LTA
Once the LTA has been used up, tax charges are payable for excess benefits as follows:
- 55% tax charge if the excess benefit is taken as a lump sum (with no further tax payable); or
- 25% tax charge if the excess benefit is taken as a pension.
Full details of LTA tax charges are covered in HMRC's Pensions Tax Manual on the GOV.UK website. The pension actually paid is also subject to income tax at your marginal rate of tax.
If you believe the amount of tax that you have paid is incorrect you will need to contact HMRC directly and present this information to them.