Last year the government announced it was abolishing the Lifetime Allowance (LTA). This potentially impacts group life insurance, with many companies previously setting up excepted group life policies to avoid tax charges if payouts exceeded this limit.
Does this mean that companies will now be abolishing excepted group life scheme? This does not seem to be the case as the LTA has been replaced by a new lump sum and death benefit allowance – the catchily named LSDBA that will replace it on April 6 this year. This new system removes some of the more punitive tax charges associated with the LTA, but many companies may choose to stick with the status quo for now – particularly with Labour currently saying it will re-instant the LTA.
Katharine Moxham of trade body Group Risk Development explain in more details what those in the industry need to know about these changes.
“For lump sum death benefits, rather than the complete abolition of the Lifetime Allowance (LTA) originally envisaged by the industry when it was announced in the Spring Budget last year, it is the LTA tax charge that has changed.
The removal of the LTA tax charge took effect for any benefit crystallisation event occurring on or after 6th April 2023. However, it was replaced by a marginal rate income tax charge for benefits in excess of the LTA.
Going forward from 6 April 2024, the LTA is being replaced by a new lump sum and death benefit allowance (LSDBA). The initial value of the LSDBA will be set at £1,073,100, which is the same as the current LTA, and any tax-free lump sum taken before death will count against it as well as any lump sum death benefit paid subsequently. So, in reality, the primary change has been that benefits over the LTA/new LSDBA are subject to an income tax charge at each recipient’s marginal rate, rather than the previous penal charge of 55 per cent.
Additionally, since in almost all scenarios LTA protections will now not be impacted by newly joining a registered arrangement, some of the reasoning for using excepted group life cover could fall away for some higher earners initially.
So, whilst the potential for a tax charge under a registered scheme still exists for a small proportion of employees, the tax rate will be lower, and the likelihood might be slightly lower.
Despite this, we could initially see a neutral impact on excepted numbers, especially as many employers will maintain the status quo whilst the new regime beds in and in case of any further changes. However, since there is no scope for the LSBDA to increase, as lump sum death benefit entitlements increase over time this might start to shift the balance towards excepted cover (albeit still with risks of entry, periodic and exit charges).
Both registered arrangements and excepted group life policies remain suitable solutions in particular circumstances so we’d encourage all employers to review their arrangements, bearing in mind that Labour committed to reversing all of this if they get into power (although, given that the changes are not as significant as had been implied at outset, and the effort involved, this is unlikely to be a priority).”
