If the total value of your pension benefits taken to date exceeds the lifetime allowance when a check is done, up until 5 April 2023 there used to be a lifetime allowance tax charge to pay on the excess plus Income Tax on any additional income you received. This was called the lifetime allowance charge.
From 6 April 2023 you will pay no lifetime allowance charge. But certain payments which would have previously been subject to a lifetime allowance charge at 55% are now taxed at your marginal rate of Income Tax where the lifetime allowance is exceeded:
lifetime allowance excess lump sum – where you are under age 75 and receive the amount over the lifetime allowance as a lump sum
uncrystallised funds lump sum death benefit – where the value of a defined contribution pension pot is paid as a lump sum on death
defined benefits lump sum death benefit – where a lump sum is paid on the death of a member of a defined benefit pension scheme
As a result of the abolition of the lifetime allowance, the maximum amount you can usually take as tax-free cash will be frozen at £268,275, which is a quarter (25%) of the lifetime allowance of £1,073,100. However, if you have previously applied for protection (see below) and were entitled to a higher tax-free lump sum on 5 April 2023 you will continue to be entitled to this higher sum.
If you apply for Fixed Protection 2016 on or after 15 March 2023 you may also be entitled to a higher amount of tax-free cash. You'll need to meet certain conditions to continue to be entitled to it.
The lifetime allowance charge – how it worked:
The way the charge applied until 5 April 2023 depended on whether the excess was taken as a lump sum or as income.