Lifetime Allowance Abolished: What It Means for Self-Employed Savers

What Was the Lifetime Allowance?

The pension lifetime allowance (LTA) was a cap on the total amount you could hold across all your pension pots without facing an additional tax charge. The last limit was £1,073,100. If your pensions exceeded this at the point of crystallisation (when you started drawing benefits), you faced a charge of 25% on the excess taken as income, or 55% taken as a lump sum.

What Changed?

The lifetime allowance charge was removed from April 2023, and the LTA was formally abolished from April 2024. There is no longer a cap on how much you can accumulate in your pension pots.

What Replaced It?

While the LTA is gone, new limits were introduced on tax-free lump sums:

• Lump Sum Allowance: £268,275 — the maximum tax-free lump sum you can take across all your pensions (equivalent to 25% of the old LTA)
• Lump Sum and Death Benefit Allowance: £1,073,100 — covers tax-free lump sums and certain death benefits

Beyond these limits, lump sum withdrawals are taxed as income.

What This Means for Self-Employed Savers

More Room to Save

Without an LTA, there is no penalty for building a large pension pot. This is good news for self-employed people who:

• Start a pension later in life and want to make large catch-up contributions
• Have variable income and use carry forward to make substantial contributions in good years
• Plan to save aggressively for retirement

The Annual Allowance Still Applies

The annual allowance (£60,000 for 2025/26) is unchanged. You can still only contribute up to £60,000 per year (plus carry forward) with tax relief. The LTA abolition does not change annual limits.

Focus on Annual Contributions

With the LTA removed, the key constraint is the annual allowance. Maximise your annual contributions and use carry forward where possible. The growth within your pension is uncapped.

Tax-Free Lump Sum Is Capped

While your pot can grow without limit, the tax-free lump sum is fixed at £268,275. Anything above this taken as a lump sum is taxed as income. Plan your drawdown strategy accordingly.

Practical Impact

For most self-employed people with pension pots below £500,000, the LTA abolition makes no immediate difference — you were not close to the limit. However, it means you can save more aggressively without worrying about hitting a ceiling.

For higher earners or those who start saving later with large contributions, the removal of the LTA is a significant benefit. You can build a £2 million, £3 million, or larger pension pot without any LTA charge.

Action Steps

1. Continue maximising your annual pension contributions
2. Use carry forward from previous years
3. Focus on low-cost investments to maximise growth
4. Plan your drawdown strategy around the lump sum allowance
5. Track your contributions and pot value annually

Use Accounted to track your income and plan your pension contributions effectively.

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The ceiling is gone — save as much as you can. Sign up for Accounted and let Penny help you understand your earnings for maximum pension saving.