The Pension Annual Allowance: What It Is and Why It Matters
The pension annual allowance is the maximum amount of pension savings you can make in a single tax year before incurring a tax charge. For the 2026/27 tax year, the standard annual allowance is £60,000. This limit applies to the total of your own contributions, your employer’s contributions, and any tax relief added by HMRC.
The annual allowance was increased from £40,000 to £60,000 starting from the 2023/24 tax year, giving most people significantly more headroom. However, high earners and those who have already accessed their pension flexibly face lower limits, as we explain below.
If your total pension inputs exceed the annual allowance (including any carried-forward allowance from previous years), you will face an annual allowance charge. This is essentially a clawback of the tax relief you received on the excess contributions.
How Pension Contributions Are Measured
To work out whether you have exceeded the annual allowance, you need to understand how pension contributions are measured for different types of scheme:
Defined Contribution (DC) Schemes
For money purchase or defined contribution pensions, the calculation is straightforward. Your pension input is the total amount paid into the scheme during the pension input period, including:
- Your personal contributions (grossed up with basic-rate tax relief)
- Your employer’s contributions
- Any third-party contributions made on your behalf
For example, if you personally contribute £32,000 (which becomes £40,000 after basic-rate tax relief is added) and your employer contributes £15,000, your total pension input is £55,000.
Defined Benefit (DB) Schemes
For final salary or career average pensions, the calculation is more complex. Your pension input is measured as the increase in the capital value of your benefits over the pension input period, using a factor of 16. The formula is:
Pension Input = (increase in annual pension × 16) + increase in lump sum entitlement
This means a pay rise or promotion can significantly increase your pension input in a DB scheme, potentially pushing you over the annual allowance even if you have not changed your contribution rate.
The Annual Allowance Charge Explained
If your pension inputs exceed the annual allowance (after accounting for any carry forward), you must pay the annual allowance charge. This is not a fixed-rate charge – it is calculated at your marginal rate of income tax on the excess amount.
| Tax Band | Rate Applied to Excess | Charge on £10,000 Excess |
|---|---|---|
| Basic rate (20%) | 20% | £2,000 |
| Higher rate (40%) | 40% | £4,000 |
| Additional rate (45%) | 45% | £4,500 |
The excess amount is added to your income for the tax year and taxed at your marginal rate. This effectively removes the tax relief you received on those contributions, meaning you end up in the same position as if you had not made the excess contributions in the first place.
Carry Forward: Using Unused Allowance from Previous Years
One of the most powerful tools for managing the annual allowance is carry forward. You can carry forward unused annual allowance from the three previous tax years, provided you were a member of a registered pension scheme during those years.
You must use the current year’s allowance first, then carry forward from the earliest available year. Here is how carry forward works in practice for 2026/27:
| Tax Year | Annual Allowance | Pension Inputs | Unused Allowance Available |
|---|---|---|---|
| 2023/24 | £60,000 | £20,000 | £40,000 |
| 2024/25 | £60,000 | £30,000 | £30,000 |
| 2025/26 | £60,000 | £45,000 | £15,000 |
| 2026/27 | £60,000 | – | £60,000 |
| Total available in 2026/27 | £145,000 | ||
In this example, you could contribute up to £145,000 in 2026/27 without triggering the annual allowance charge. However, your contributions are still limited by your relevant UK earnings for tax relief purposes (unless your employer is making the contributions). Learn more about carry forward in our dedicated guide on pension carry forward rules.
The Tapered Annual Allowance for High Earners
If you are a high earner, your annual allowance may be reduced through the tapered annual allowance. This affects you if both of the following apply:
- Your threshold income (broadly, your taxable income before pension contributions) exceeds £200,000
- Your adjusted income (threshold income plus pension contributions) exceeds £260,000
For every £2 of adjusted income above £260,000, your annual allowance is reduced by £1. The minimum tapered annual allowance is £10,000, which applies when your adjusted income reaches £360,000 or more.
For a detailed explanation and worked examples, see our guide on the tapered annual allowance.
The Money Purchase Annual Allowance (MPAA)
If you have flexibly accessed your defined contribution pension benefits – for example, by taking income through flexi-access drawdown or taking an uncrystallised funds pension lump sum (UFPLS) – your annual allowance for further money purchase contributions is reduced to £10,000. This is the money purchase annual allowance (MPAA).
The MPAA cannot be carried forward, and it applies only to money purchase contributions. You can still make contributions to a defined benefit scheme up to a separate limit. Taking your 25% tax-free cash alone does not trigger the MPAA, as long as you do not take any taxable income from your pension.
How to Report and Pay the Annual Allowance Charge
If you exceed the annual allowance, you must report it on your Self Assessment tax return. You should complete the pension savings section of the return, declaring your total pension inputs and any carry forward used.
Scheme Pays
If your annual allowance charge is more than £2,000, you may be able to use “Scheme Pays”. This allows your pension scheme to pay the tax charge on your behalf by reducing your pension benefits. There are two types:
- Mandatory Scheme Pays: Your scheme must offer this if the charge is over £2,000 and the excess was caused by contributions to that scheme. You must notify your scheme by 31 July following the end of the tax year.
- Voluntary Scheme Pays: Some schemes offer this even when the mandatory conditions are not met. Terms vary by provider.
Practical Steps to Avoid Exceeding the Annual Allowance
- Track your pension inputs carefully – Monitor contributions to all your pension schemes throughout the tax year
- Check for carry forward – Review your unused allowance from the previous three years before making large contributions
- Consider salary sacrifice timing – If your employer offers salary sacrifice, plan the timing of any bonus sacrifice carefully
- Watch DB scheme pay rises – Be aware that promotions and pay rises can push your pension input amount higher than expected
- Get advice if you are near the taper – If your income is close to the £200,000 or £260,000 thresholds, professional advice on maximising your pension tax relief can save significant money