RPSM11105220 - Technical Pages: Lifetime allowance: Where the lifetime allowance is used up: Chargeable amount: The basic amount and a scheme-funded tax payment

The amount that actually crystallises through a BCE over and above the member’s available lifetime allowance is referred to as the basic amount of the chargeable amount.

This basic amount will be made up of either a lump-sum amount or retained amount (or a combination of the two) depending on the events taking place. From this breakdown the level of lifetime allowance charge due can be identified (see RPSM11105210).

For BCEs other than those dealing with the entitlement to a scheme pension the actual lifetime allowance charge paid by the scheme administrator is referred to in the legislation as a ‘scheme-funded tax payment’, and is added on to the basic amount to form part of the chargeable amount. This is because, for these BCEs, the amount crystallised is the net amount after tax (so the net lump sum paid by the scheme, the net amount being designated to provide a drawdown pension fund ,before 6 April 2011 an unsecured pension fund, etc.). Adding the tax paid by the scheme administrator ensures that the taxable amount is the gross amount before tax.

Where a scheme-funded tax payment needs to be added to the basic amount to form the chargeable amount, the scheme administrator will want to ensure that the tax they pay, which forms the scheme-funded tax payment, is the same amount that will be due on the gross chargeable amount.

For example, if a member, aged between 55 and 75, with no available lifetime allowance has uncrystallised funds of £100,000 in a money purchase arrangement and wishes to use it to provide a lifetime annuity, the scheme administrator is likely to use £75,000 to purchase the annuity and pay £25,000 to HMRC to cover the lifetime allowance charge due. This will mean that the basic amount is the £75,000 crystallising through BCE 4, the scheme-funded tax payment is £25,000 and the chargeable amount is £100,000. The tax due on the chargeable amount is £25,000, the same amount that the scheme administrator has paid.

If the scheme administrator allowed the full £100,000 to be used to purchase a lifetime annuity, and to fund the tax out of the scheme’s own resources, then the amount crystallising through BCE 4 would be £100,000. The scheme administrator would need to pay £33,333 of lifetime allowance charge to HMRC as a scheme-funded tax payment - so the chargeable amount would be £133,333 and the charge due (and already paid) would be £33,333.

RPSM11105250 provides an example illustrating the above.