For decades, the Lifetime Allowance (LTA) capped the amount you could accumulate in registered pension schemes without triggering an additional tax charge. Set at £1.073 million immediately before its abolition, the LTA forced many higher earners to stop contributing prematurely or face a 25% / 55% tax charge on the excess.
From 6 April 2024 the LTA was abolished entirely. In its place sit three new lump sum allowances, alongside the existing annual allowance and money purchase annual allowance.
The new lump sum allowances
1. Lump Sum Allowance (LSA) — £268,275
This caps the total tax-free cash you can take across all your pensions during your lifetime. It is set at 25% of the old LTA. Tax-free cash above this allowance is taxed at your marginal income tax rate.
2. Lump Sum and Death Benefit Allowance (LSDBA) — £1,073,100
This caps the total of all tax-free lump sums (in life and at death) you can receive across all your pensions. Once exceeded, further lump sums attract income tax at the recipient's marginal rate.
3. Overseas Transfer Allowance (OTA) — £1,073,100
This applies to transfers to qualifying recognised overseas pension schemes (QROPS). Transfers above this allowance attract a 25% overseas transfer charge.
The annual allowance — unchanged at £60,000
The standard annual allowance remains at £60,000 (increased from £40,000 in April 2023). This is the maximum total contribution (employer plus employee plus tax relief) that benefits from full tax relief in a tax year.
Tapered annual allowance
High earners still face a tapered annual allowance:
- The taper begins when "threshold income" exceeds £200,000.
- For every £2 of "adjusted income" above £260,000, the annual allowance reduces by £1.
- The minimum tapered allowance is £10,000 (for those with adjusted income of £360,000 or more).
The taper rules are notoriously easy to trip over. A bonus paid in March that pushes you above the threshold can quietly reduce the available pension contribution for the entire tax year and trigger a charge if you have already contributed more than the tapered limit.
Carry forward — three-year window
Unused annual allowance from the previous three tax years can be carried forward, provided you were a member of a registered pension scheme in each of those years. For business owners with lumpy income, this is the single most powerful pensions tool — three years of carry-forward plus the current year can fund up to £240,000 of contributions in a single year.
Money Purchase Annual Allowance (MPAA) — £10,000
If you have already drawn taxable income from a defined contribution pension flexibly (more than just the tax-free cash), your annual allowance drops to £10,000 for future DC contributions. This catches people who took flexible drawdown during the pandemic to bridge a cash gap and now want to resume pension funding.
The new sweet spot for owner-managed businesses
Employer pension contributions remain one of the most tax-efficient extraction routes:
- Deductible against corporation tax (no upper limit beyond wholly-and-exclusively).
- No employer NIC.
- No employee NIC.
- No income tax until benefits are drawn — and then 25% (up to LSA) is tax-free.
For a company in the marginal relief band paying 26.5% effective corporation tax, a £40,000 employer pension contribution costs £29,400 net. The same £40,000 taken as a dividend by a higher-rate shareholder costs around £19,895 after tax — but only after the corporation tax has already been suffered. On a like-for-like extraction-cost basis, pensions still win for the deferrable portion of income.
Protected lump sums
If you previously held Fixed Protection or Individual Protection against the LTA, you may have a personally higher LSA and LSDBA. These need to be tracked carefully — protections are easily lost by making further contributions, and the cost of losing protection has, paradoxically, decreased since LTA abolition (because the LTA charge no longer exists) but the LSA cap remains.
IHT and pensions — major change from April 2027
As covered in our IHT insight, unused pension funds will be brought within the IHT estate from 6 April 2027. This is a fundamental shift in how pensions sit within an estate plan. Drawdown strategies, beneficiary nominations, life cover, and even whether to crystallise sooner all need to be revisited.
Planning checklist
- Confirm your remaining LSA — if you have already taken tax-free cash from earlier crystallisations, the headroom is smaller than you might think.
- Review the three years of unused annual allowance available for carry-forward.
- If your income is above £200,000, recalculate the tapered annual allowance for the current and prior years.
- Owner-managers: model employer pension contributions against dividend extraction at the company's marginal corporation tax rate.
- Update pension expression-of-wish forms before April 2027.
Pensions remain the most powerful tax-advantaged wrapper in the UK system, but the rules now require more active management than at any previous point. Our tax planning service includes annual pensions modelling for every client at director or higher-earner level, integrated with corporation tax planning for owner-managed companies. Book a pension review ahead of your next bonus or year-end.