If your pension changes you may need to check your tax position.
Below is a summary of our understanding of the tax position based on current guidance, but remember it is your responsibility to check your benefits and determine any tax impact based on your personal circumstances.
If your pension increases
This could push your yearly income into a higher tax bracket.
If you receive a one-off additional payment
This could push your income for the year into a higher tax bracket.
This means you might have to pay more tax for the year in question than if you had received the right level of pension in the first place.
If this happens, you can apply to HM Revenue & Customs using the letter template below to spread the tax that is due over the previous years to which the additional payment relates.
Lifetime Allowance: a reminder
The Lifetime Allowance applies to the overall value of UK pension benefits (apart from the State Pension) you can build up over your working life without triggering an extra tax charge. At the point that you start to take your benefits, they are tested against the Lifetime Allowance. If you go over it, you will have to pay an extra tax charge on the amount above the allowance.
Please note: The Lifetime Allowance will not affect most people. It is your responsibility to check whether or not your benefits go over any HM Revenue & Customs allowances.
This table shows the Lifetime Allowance, so you can check what it was in the year you retired:
In the Budget on 15 March 2023, the Government announced a removal of the Lifetime Allowance tax charge for members retiring from 6 April 2023 and the intention to abolish the Lifetime Allowance from 6 April 2024. For more information on the Lifetime Allowance, please visit the Government website at https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance
If you are close to the Lifetime Allowance or have certain Lifetime Allowance protection
If you receive an additional payment, and some or all of it is because your pension should have been higher due to unequal GMPs, the percentage of Lifetime Allowance you used up may change. In addition, if the increase is more than a permitted maximum, this may also affect your Lifetime Allowance.
Extra tax charge
The ‘Lifetime Allowance charge’ is an extra tax charge of 25% - on top of your own highest tax rate – on the benefits you have built up above the Allowance.
If you are already over 100% of the Lifetime Allowance, the RSA scheme administrators will take the charge from your benefits before making any payment. The charge will then be paid to HMRC automatically.
Here are three examples of members who might be affected by the Lifetime Allowance in these circumstances.
Barbara has RSA benefits already over the Lifetime Allowance. Her review shows that she should have received a higher pension from the date she retired, so she receives an additional payment from the Scheme.
- The RSA scheme administrators will take the extra Lifetime Allowance charge (along with any other tax) from Barbara’s pension payment.
- Barbara must let HMRC know about the change to her Lifetime Allowance position so she calls HMRC’s pension scheme services helpline on 0300 123 1079 for guidance on how to do this.
Peter has RSA benefits making up 90% of the Lifetime Allowance. This percentage would go up to 95% after he’s received his additional payment.
- Peter does have benefits in other schemes. He checks their Lifetime Allowance percentages and calculates that the total is now over 100%.
- Peter must tell the RSA scheme administrators that he is now over the Lifetime allowance.
- Peter must also let all the scheme administrators of his other UK pension schemes and HMRC know that he is now over the Lifetime Allowance.
- The RSA scheme administrators will then take the extra Lifetime Allowance charge (along with any other tax) from Peter’s pension payment.
Shweta has RSA benefits making up 88% of the Lifetime Allowance. This percentage goes up to 90% when she receives her additional payment.
- However, unlike Peter, Shweta does not have any benefits in other schemes. This means she is still below the Lifetime Allowance, so there is no Lifetime Allowance charge extra tax to pay, and no need for her to do anything.
- The RSA scheme administrators will continue to take tax from Shweta’s pension payment in the usual way.
Separately, if you have Enhanced Protection, although very rare you could lose this protection in the future as a result of GMP equalisation, depending on your particular circumstances.