The Pension Annual Allowance Explained

The annual allowance is the ceiling on how much can be paid into your pensions each tax year while still getting tax relief. For 2025/26 the standard allowance is £60,000, covering everything that goes in, your contributions, your employer’s, and the tax relief on top. Stay within it and pensions remain wonderfully tax-efficient; breach it without cover and HMRC claws back the relief through an annual allowance charge.

For most savers £60,000 is far more than they will ever pay in, so the allowance never bites. But for higher earners, people selling a business, those receiving large bonuses, or anyone trying to catch up late in their career, the rules, carry forward, tapering and the money purchase allowance, become very real. This guide makes them clear.

What the allowance is and what counts

The annual allowance measures the total pension input across a tax year. For a defined contribution pension that means every contribution paid in: yours, your employer’s and the basic-rate tax relief added by the provider. For a defined benefit pension it is more subtle: it is based on the growth in the value of your promised pension over the year, not the contributions.

There is also a separate earnings test. You can only get personal tax relief on contributions up to 100% of your relevant UK earnings (or £3,600 if you earn less). The annual allowance sits on top of that as an overall cap. We explain how the two interact in our guide to how much you can pay into a pension tax-free.

One quirk trips people up: the allowance is measured over the pension input period, which is now aligned to the tax year (6 April to 5 April), and it spans all your pensions together. You do not get a fresh £60,000 for each scheme. Someone paying into a workplace pension and a separate SIPP has to add both together, along with every employer contribution, to see where they truly stand against the limit.

The defined benefit calculation deserves a word, because it surprises people. Your DB “input” for the year is not what you or your employer paid in; it is a measure of how much your promised pension grew over the year, multiplied by a standard factor (currently 16), with an inflation adjustment applied. A large pay rise late in a long career can therefore produce a big pension input, and occasionally an allowance issue, even though no visible “contribution” ever changed hands. Public-sector workers with long service are the most likely to encounter this.

Carry forward: using past years

If you have not used your full allowance in recent years, carry forward lets you mop up the shortfall. You can bring forward unused allowance from the previous three tax years and add it to the current year, potentially allowing a contribution well above £60,000 in one go. To use it, you must have been a member of a registered pension scheme in the years you are carrying forward from, and you still need enough earnings this year to support the contribution.

Carry forward is especially useful after a bonus, an inheritance or a business sale, when someone suddenly has the means to make a large one-off contribution. The catch is always earnings: you cannot get relief on more than you earn in the current year, however much unused allowance you have banked.

There is no formal claim process for carry forward, you simply make the larger contribution and, if asked, show that you had the unused allowance and the earnings to support it. That makes good record-keeping important: keep your annual pension statements and know roughly what went in each year. If a contribution turns out to exceed what was actually available, the excess is taxed, so it is worth checking the figures carefully before making a big one-off payment.

The mechanics run in a strict order: you fill the current year’s allowance first, then reach back to the earliest of the three previous years and work forwards. You do not need to have earned the money in those earlier years, but you must have earnings this year at least equal to the personal contribution you want to make. Employer contributions, by contrast, are not restricted by your earnings, which is one more reason company contributions can be so powerful for anyone playing catch-up.

The tapered allowance for high earners

For high earners the £60,000 allowance shrinks. If your adjusted income (broadly your total income plus pension contributions) exceeds £260,000, the allowance tapers by £1 for every £2 above that threshold, down to a floor of £10,000. There is also a threshold income test (currently £200,000) below which the taper does not apply, designed to protect people whose income only looks high because of a one-off pension input.

A subtlety worth knowing: because threshold income generally excludes your own pension contributions, making a personal contribution can sometimes keep you below the £200,000 threshold and switch the taper off altogether. This is exactly the kind of situation where a small change in how you contribute has an outsized effect, and where getting the definitions wrong can be expensive.

The interaction between the taper, bonuses and the 60% tax trap makes pension planning for high earners a specialist area, one we explore alongside our wider personal tax planning guide.

The Money Purchase Annual Allowance

A third limit catches people who have already started dipping into a defined contribution pension flexibly, for example, taking taxable income through drawdown or a lump sum beyond the tax-free portion. Once you trigger it, the Money Purchase Annual Allowance (MPAA) replaces your £60,000 limit with a much lower figure (currently £10,000) for future defined contribution saving, and you lose the ability to carry forward for those contributions.

This matters most for the growing number of people who work part-time in “semi-retirement” while dipping into a pension. Taking even a small flexible income can quietly slash how much you can later pay back in, so it is worth understanding the trigger before you touch a pot. Simply taking your tax-free cash alone does not usually trigger the MPAA, and buying a lifetime annuity or taking income from an older “capped” drawdown arrangement within its limit generally does not either.

Importantly, the MPAA applies only to future defined contribution saving; it does not affect defined benefit accrual, which keeps its own allowance. And once triggered, it cannot be undone. That makes it essential to think ahead before taking a flexible income if you expect to keep contributing, a very common situation for people easing gradually out of full-time work while still doing some paid work on the side.

What happens if you exceed it

If your total pension input exceeds the allowance available to you (including any carry forward), the excess is added to your taxable income and taxed at your marginal rate, the annual allowance charge. In effect, it removes the tax relief you were not entitled to. For larger charges, a mechanism called “Scheme Pays” can let the pension itself settle the bill rather than you finding the cash.

Scheme Pays comes in two forms, a mandatory version for larger charges that meet set conditions, and a voluntary version many schemes offer for smaller ones. Using it reduces your pension pot to settle the tax, so it is a convenience rather than a saving, but it spares you finding a lump sum from elsewhere. Either way, an unexpected annual allowance charge is best avoided by checking your position before you contribute, not discovering it afterwards.

Staying on the right side of the rules

None of this needs to feel intimidating. For the great majority of savers the £60,000 allowance is comfortably out of reach and none of the complications apply. But if you are a high earner, expecting a windfall, or already drawing on a pension, a few simple checks each year keep you firmly the right side of the rules.

• 1

  Total up every contribution

  Include personal, employer and tax-relief amounts across all your pensions, plus DB growth.

• 2

  Check for carry forward

  If you have unused allowance from the last three years and the earnings to match, you may be able to pay in far more.

• 3

  Test whether the taper applies

  If your income is near or above £200,000, work through the adjusted and threshold income figures carefully.

• 4

  Watch the MPAA trigger

  If you have taken flexible income from a defined contribution pot, your limit may already be just £10,000.

The annual allowance rewards those who understand it and penalises those who do not. If your situation involves the taper, a large one-off contribution or the MPAA, a specialist view is worth having. Vetted Wealth matches you free of charge with FCA-regulated, independently vetted pension advisers, and you can explore more in our pensions guide library. This is information, not personal advice; tax rules can change.

Common questions on pensions