HMRC Details Reduction To Lifetime Allowance

by Amanda Banks, Tax-News.com, London

20 December 2010

The UK tax authority, HM Revenue and Customs (HMRC) has published interim guidance on draft legislation that has been proposed to reduce the tax relief granted to taxpayers on their lifetime pension contributions through a reduction to the 'lifetime allowance'.

On December 9 HMRC published draft legislation primarily to cut the lifetime allowance – the amount that taxpayers can receive through pension schemes and still remain to benefit from tax relief – from GBP1.8m currently, to GBP1.5m, from April 6, 2012.

Taxpayers receiving a pension of greater worth than GBP1.5m will be subject to a tax charge on the remainder. For instance, HMRC explained, a taxpayer receiving pension benefits worth GBP2m would be subject to tax of GBP0.2m on the GBP0.5m balance. This charge, HMRC said, recovers tax relief that the taxpayer received when these pension savings were being built up.

Other salient features of the proposals include:

• There will be a new form of protection called ‘fixed protection’. This protection will be available to people who expect the amount of their pension savings to be more than GBP1.5m when they come to take their benefits;
• Anyone with existing primary or enhanced protection will continue to be unaffected by the reduction in the lifetime allowance;
• If you take a lump sum instead of a small pension this is known as ‘trivial commutation’. The maximum amount of pension savings that can be commuted on grounds of triviality will no longer be linked to the lifetime allowance – it will be fixed at its current level of GBP18,000.

As a transitional rule, HMRC is to allow taxpayers that expect to receive funds in excess of GBP1.5m to apply for fixed protection not later than April 6, 2012.

The publish of the draft guidance coincides with previous guidance published by HMRC on the reduction to the annual allowance from April 6, 2011.

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