Can I forget about the lifetime allowance now?

Posted: 14/02/2024

In the Spring budget presented in March 2023, the government announced the abolition of what is known as the lifetime allowance. The abolition is to be fully implemented from 6 April 2024. One of the key reasons for this was the adverse impact the allowance had on NHS consultants, and on other high-earning employees.

By way of an explanation, the lifetime allowance is the maximum overall amount of pension savings you can build up over your lifetime in a tax-efficient way. If you previously built up pension savings which exceeded the lifetime allowance, substantial tax charges used to arise, unless you secured registered HMRC protection. The allowance applies to benefits accrued under all pension schemes which are registered with HMRC. 

So, can this allowance now be forgotten about? Well. Not quite!

For employers, the message is that, whilst high earning employees will no longer receive substantial tax bills, it is important to be mindful of any existing contractual provisions which relate to the lifetime allowance (and to consider amendment where appropriate to reflect its abolition). Employment contracts which provide for high-earners to receive an additional payment/allowance in lieu of employer pension contributions are common (because those high earners have registered lifetime allowance protection) – such contractual provisions should now be reviewed.  

Employees, on the other hand, may actually prefer the existing approach for pension benefits as set out in their contract, and may not want this to change.    

The concept of the lifetime allowance will also live on in the pensions tax rules. This will be in the form of allowances for amounts of a small number of specific pension scheme benefits.   

No more tax bills 

The lifetime allowance was set at a high level and so it was usually a concern for high earners only. 

NHS consultants are perhaps the highest profile example of high earners that were affected. They work a great deal of overtime, building up further pension benefits as a result, and that took many of them over the lifetime allowance. This presents an issue for the NHS as, clearly, it needs consultants to work long hours. On the other hand, NHS consultants themselves were not happy at all with the prospect of substantial tax bills of thousands of pounds, resulting in many choosing to retire early to avoid that risk, with the consequence being a significant loss of senior, experienced doctors in the NHS.  

So, the government took action, and the lifetime allowance is to be abolished from 6 April. 

The result is that there will be no maximum for the overall amount of pension savings which an individual can build up in a tax-efficient way in a pension scheme registered with HMRC. Therefore, the tax bills which NHS consultants and other high earners previously received when their total pension savings exceeded the lifetime allowance no longer apply.    

That is good news for high earning employees. However, is there anything which could be a cause for concern?  

The short answer is that yes, potentially, there could be. This stems from the steps that some employers and employees previously took to avoid tax charges. 

At work

Like the government, many employers took steps to help their high-earning employees avoid substantial tax charges as a result of the lifetime allowance.  

Some employers agreed to provide cash in lieu of employees building up further pension benefits. 

A few employers agreed to provide pension arrangements which are not registered with HMRC and do not provide the usual tax efficiencies, but to which the lifetime allowance does not apply.   

Where employers were required by legislation to automatically enrol high-earning employees into a pension scheme, those employees themselves sometimes had to take action to immediately opt-out of the pension scheme in order to avoid building up further pension benefits and falling foul of the lifetime allowance.   

What about changing remuneration now?  

Employers may now want to change the shape of remuneration or employee benefits to reflect the abolition of the lifetime allowance. The steps which employers previously took, though, are often set out in contracts of employment or service agreements and form part of an employee’s terms and conditions. 

Therefore, whether and how employers can change remuneration now might well come down to the precise wording in contracts. 

Terms hard-baked into contracts of employment 

Employers thinking about a change to remuneration or employee benefits should check the position in their contracts of employment. This is to see what room there is for a change. 

If a step which an employer took to help a high-earning employee is hard-baked into a contract of employment, that might make a change to remuneration now more difficult.  

It is suggested that employers ensure the position taken in their contracts of employment accurately reflects what happens in practice when they do provide an alternative to benefits under a pension scheme registered with HMRC.   

Equally, employees may simply be able to say to their employer, ‘I would prefer to retain the existing approach for my pension benefits which is set out clearly in my contract of employment, thank you very much!’ 

The concept lives on

The concept which underpinned the lifetime allowance will actually continue to live on in a different guise, but will form a much more limited part of the pensions tax rules.   

This is because the lifetime allowance now is to be used in connection with setting amounts of allowances, which will apply from 6 April, for certain lump sums that a pension scheme registered with HMRC can pay tax-free. These lump sums can be paid in specific circumstances to a member, or, on the death of a member, to another beneficiary, such as a dependant of a member.   

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