Pension tax 14 January 2026 6 min read

What is the UK Lump Sum Allowance? The £268,275 cap explained

Most UK savers know about the “25% tax-free cash” rule for pensions. Fewer know there's a lifetime cap on how much of that 25% you can ever take. That cap is the Lump Sum Allowance, and it sits at £268,275.

For people with pension pots under about £1 million, the Lump Sum Allowance is invisible - you'll never get close. For higher earners, near-retirees with consolidated pots, or anyone modelling several pension pots together, it becomes a planning constraint worth understanding properly.

What the Lump Sum Allowance actually does

The Lump Sum Allowance (LSA) is the total amount of tax-free cash you can withdraw from all your registered UK pensions across your lifetime. As of the 2025/26 tax year, that figure is £268,275.

It's tracked across every crystallisation event you trigger:

• You crystallise £100,000 of your pension → 25% (£25,000) goes to tax-free cash, your LSA usage becomes £25,000.
• Later, you crystallise another £200,000 → another £50,000 of tax-free cash, your LSA usage rises to £75,000.
• And so on, until you've used up £268,275 of cumulative tax-free cash.

Once you hit the cap, the 25% tax-free entitlement effectively ends. Further crystallisations still happen, but the entire amount becomes taxable income - there's no remaining tax-free portion to allocate.

Important: the LSA doesn't cap your income or your annual withdrawals. You can still draw down your pension at any rate (see our FAQ on withdrawal caps). It only caps the tax-free portion of those withdrawals across your lifetime.

Where does the £268,275 figure come from?

The number isn't arbitrary. The Lump Sum Allowance was introduced in April 2024 as part of the package that abolished the old Lifetime Allowance (LTA).

For many years, the LTA capped the total value of a UK pension at £1,073,100 (as of 2023/24). Going above the limit triggered substantial tax charges. The Spring Budget 2023 abolished the LTA from April 2024 - but rather than removing the tax-free cap entirely, the government held it at the same notional level:

25% of £1,073,100 = £268,275

So the £268,275 LSA is best understood as “the maximum tax-free cash anyone could take under the old LTA, preserved as a separate cap when the LTA was abolished.” It rounds to a precise figure because it's exactly a quarter of the final LTA value.

What happens when you reach the cap

There are no penalties or charges. Drawdowns after the cap is reached are simply taxed as income at your marginal rate - 20% / 40% / 45% under the standard UK bands, or the relevant Scottish bands (19% / 20% / 21% / 42% / 45% / 48%). You still control when and how much you withdraw - flexi-access drawdown remains uncapped - but you've lost the 25% tax-free portion on anything from that point forward.

For someone managing crystallisation deliberately, this matters most around the boundary. Crystallising in chunks means the LSA tracker ticks up gradually; crystallising the whole pot at once just consumes more of the cap in one go.

Common misunderstandings

A few things the LSA is not:

• It isn't a withdrawal cap. People sometimes confuse the LSA with an annual income limit. It's neither. Flexi-access drawdown has no upper limit on annual income, and the LSA only caps cumulative tax-free cash.
• It isn't per-pension. All your registered UK pensions count together. Combining your workplace pension with a SIPP and an old defined-contribution scheme doesn't give you three separate £268,275 caps - it's one £268,275 cap across the lot.
• It isn't the same as the old Lifetime Allowance. The LTA capped the total pension value (and had tax charges for breaching it). The LSA only caps the tax-free portion (and has no charges - you just lose the tax-free treatment beyond the cap).
• It doesn't reset annually. It's a lifetime cap. Used capacity stays used.

How Excelergy tracks the LSA

The Excelergy planner models the LSA automatically across every crystallisation event in your scenario:

• LSA used (start) input - if you've already started drawing from a pension, set this to the amount of tax-free cash you've taken so far. Your pension provider's drawdown statement will show it. If you're not sure, 25% of your current Crystallised pot is a reasonable starting estimate.
• Automatic crystallisation - when retirement spending is funded by your pension, the model crystallises just enough to cover the gap and ticks the LSA tracker up by the corresponding tax-free portion (25p per £1 crystallised, up to the cap).
• Post-cap handling - once the £268,275 cap is reached, further crystallisations move money 1:1 into the taxable pot. The 25% tax-free portion stops being applied.

You can see the running LSA consumption in the year-by-year ledger via the Auto-cryst column under the Deductions group, which shows how much was crystallised each year. The Crystallised pot column shows what's accumulating on the taxable side.

When it matters most

The LSA is a real planning constraint if:

• Your total pension value is above ~£1 million and you're planning to crystallise the whole pot.
• You're combining multiple pension pots and the total tax-free cash you'd take exceeds £268,275.
• You're considering very large lump-sum crystallisations to fund one-off events (mortgage payoff, property purchase, business buy-in).

If you're under £1 million in total UK pension value, you'll likely never approach the cap. It's still worth understanding because it's the figure your pension provider will reference in drawdown paperwork, and a partially-used LSA from earlier crystallisations can change the maths on later ones.