As a new tax year approaches, it is important to ensure you are in the best financial position to help protect and grow your future wealth.
Our Bitesize Tax Planning provides you with details of the key allowances and reliefs available to you. The tax planning tips are available in easy to consider sections.
This article looks at The Pension Lifetime Allowance (LTA).
Pension tax relief
The LTA is the amount of tax relieved pension savings you can accrue during your lifetime, without being subject to an additional tax charge. This has been severely reduced in recent years and is currently £1,073,100. This allowance has now been frozen until April 2026. Some people may have a higher protected LTA.
The LTA affects high earners and those approaching retirement age the most, including those with defined benefit pensions. As the value of high earners’ pensions rise over the next five years towards a lifetime limit that will remain fixed, more and more individuals may find they need to stop contributing to avoid breaching the limit.
Once your total pension funds and benefits exceed the LTA, you will be required to pay an additional tax charge on the excess funds. The charge is payable at the earliest of accessing the excess pension funds, death before 75 or reaching age 75. The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is used.
- 55% if you get it as a lump sum (with no additional income tax)
- 25% if you get it any other way, for example leaving the excess funds in drawdown or using them to provide an annuity or scheme pension (with income tax due in the normal way on any income received)
Some pension schemes may benefit from protection which preserves a higher level of LTA. These protections may be useful if you have a pension pot which already exceeds the standard LTA or possibly at retirement, even if you stop your pension saving now.
Further information on protecting your LTA can be found here: gov.uk or speak to your adviser to see if there are other savings options that you can make and avoid being hit by a penalty tax charge.
See the other topics in our Bitesize Tax Planning series:
Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.
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Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.
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