Pensions – the removal of the LTA charge

In a surprise move in the 2023 Spring Budget, the Chancellor announced the removal of the Lifetime Allowance (LTA) charge from 6 April 2023. This is a significant change for those with large pension pots who were previously facing tax charges of up to 55%.

While the LTA itself still exists until its full abolition in 2024, the removal of the charge provides an immediate opportunity for high earners to continue contributing to their pensions without fear of exceeding the limit.

Why was the charge removed?

The primary motivation behind removing the LTA charge was to address retention issues in the public sector, particularly within the NHS. Many senior doctors were choosing to retire early or reduce their hours to avoid being hit by massive tax bills when their pension pots breached the £1,073,100 limit. By removing the charge, the government hopes to encourage highly skilled professionals across all sectors to remain in the workforce longer.

What it means for high earners

Previously, individuals who had reached or were nearing the LTA limit often stopped making pension contributions entirely. With the punitive tax charge removed, pensions are once again a highly attractive, tax-efficient way to save for retirement, regardless of the size of the pot. Contributions benefit from tax relief at your marginal rate, and the funds grow free from Capital Gains and Income Tax.

The tax-free cash limit remains

It is important to note that while the LTA charge has gone, the maximum amount of tax-free cash you can take from your pension has been capped. You can still take 25% of your pension tax-free, but this is now limited to a maximum of £268,275 (which is 25% of the old LTA). Any lump sums taken above this amount will be taxed at your marginal Income Tax rate.