WTW comment
Spring Budget 2023 announced the removal of the LTA from UK pensions tax legislation from 6 April 2024. A control was still needed in relation to the payment of tax-free lump sums, and this takes the form of a new Lump Sum Allowances regime, similarly with effect from 6 April 2024. This was a mammoth task and so some elements were unfinished at the changeover date. In newsletter 158, HMRC itemized some of the outstanding points, the more significant of which WTW has been liaising with HMRC on for some time eg problems with the scheme-specific lump sum (SSLS) determination.
HMRC appears to have used the break imposed by the General Election to good effect, with the draft regulations generally delivering what we had been expecting. We hope that the certainty of intention will enable more schemes (that have not yet adopted a workaround) to recommence payment of benefits currently on hold.
In terms of legislative intent, one notable exception is lump sum death benefits paid from funds which crystallized prior to 6 April 2024 – Question 20 of the FAQs published alongside pension scheme newsletter 159, acknowledged that the permitted maximum could still limit the tax-free amount that can be paid, and stated that this was not intentional and would be corrected. We have asked HMRC how this is addressed by these Regulations, although acknowledge that these benefits are, in any event, paid gross by schemes as, even if taxable, income tax is levied on the recipients later, after the end of the tax year by HMRC.
Further, we are pleased that HMRC took on board some other issues raised by WTW, particularly in relation to the new transitional tax-free amount certificates (TTFAC). This will make the process more manageable, especially for death benefits as personal representatives will have an extended period to apply for a TTFAC.
There were also some changes proposed that had not been signposted in newsletters and so were unexpected, such as the valuation approach for trivial commutation payments. This is, in effect, reverting to that under the LTA regime – and backdated to 6 April 2024.
There are possible other changes that would have been welcome but did not feature. These include removing the limit on authorised dependants scheme pensions on death after age 75 and delinking the pension commencement excess lump sum from any entitlement to pension. We recognize that the priority is the immediate issues that are potentially delaying benefit payments, but there must now be doubt as to when, or even whether, these will be addressed.
Although the newsletter only commits to legislation “as soon as the parliamentary timetable permits”, we hope that HMRC has, by now, agreed a date with the government’s business managers and that this will be in September. We would not expect it to publish the date as the parliamentary timetable needs to retain flexibility and to do so would be hostage to fortune.
There are two sets of Regulations. This is because some measures could impose additional tax on individuals (with backdated effect) and these need to be made under the ‘affirmative procedure’ whereby they need to be actively approved by Parliament. The corrections to the SSLS fall under these Regulations. Other measures potentially reduce the tax due and will be made under one of the ‘negative procedures’ whereby the legislation comes into force unless an objection is made. These include the changes related to TTFACs. We expect this to mean that the ‘negative’ Regulations would not come into force until at least 21 days after being laid before Parliament.
