Lifetime Allowance Charge
If the member is alive, the Scheme Administrator must check the amount crystallising each time there is a BCE to ensure that the appropriate tax is paid on any funds taken above the LTA. The Scheme Administrator must calculate the capital value of the benefits coming into payment, to verify the percentage of the LTA being used. As discussed above, the method of doing this depends on the BCE.
If the percentage of the LTA crystallising is greater than the percentage available, the excess becomes a 'Chargeable amount' and the 'Lifetime allowance charge' is applicable.
The tax rate depends on whether the excess is paid as a lump sum - called a Lifetime allowance excess lump sum and charged at 55% - or if retained to pay pension benefits, charged at 25% (tax is then payable on the income the member receives at their marginal rates).
If the member is alive, the liability for paying the LTA charge falls jointly on the Scheme Administrator and the member. Normally, the Scheme Administrator is obliged to deduct the tax charge before a 'retirement' payment is made. If, however, the charge arises on the member's death, the recipient of the payment is liable.
The scheme administrator must pay, and account for, the LTA charge to HMRC on a quarterly basis (through the Accounting for Tax Return).
Where a chargeable amount applies, the scheme administrator must send the member a notice showing;
- the level of the Chargeable amount;
- how this was calculated; and
- the level of LTA charge deducted (or how they propose the tax due should be paid).
The scheme administrator must give a BCE statement to the member (or if the member has died to their personal representatives);
- at least once every tax year if the member is receiving a pension from the scheme (this includes the member having designated funds to provide drawdown pension); or
- where the scheme administrator isn’t required to provide an annual BCE statement for the tax year, within three months of a BCE that has occurred under the scheme in respect of the member. This doesn’t include a statement in respect of a BCE 5C or BCE 7 as the scheme administrator is required to notify the member’s personal representatives of this under the Provision of Information regulations - see PTM165100.
Read more in section PTM164400 of the Pension Tax Manual on the Gov.uk website
The provider may become liable for any LTA charge not paid. The provider may also be liable, potentially, for additional charges and fines, unless they have evidence that they acted on information from the member that was believed to be reliable.
In these circumstances, specific information must be provided to HMRC within certain time limits. If they consider that the scheme administrator acted in good faith, then the member becomes solely liable for the charge.
Finance Act 2004 - S214 - 226, Sch 32