Pension Annual Allowance Explained (2026-27)

The pension annual allowance is the maximum amount you (and your employer) can contribute to your pension pots each tax year while still receiving full tax relief. For 2026-27, the standard annual allowance is £60,000. If you exceed this limit, you'll face a tax charge on the excess at your marginal income tax rate. The allowance can be reduced if you're a high earner (through the tapered annual allowance) or if you've already started taking money from your pension flexibly (triggering the money purchase annual allowance of £10,000). Understanding these rules is crucial for maximising your retirement savings without unexpected tax bills.

What is the Annual Allowance?

The annual allowance (AA) is the total amount that can be contributed to all your pension schemes in a single tax year before you trigger a tax charge. For 2026-27, this limit stands at £60,000 [FA 2004 s.228]. This was increased from £40,000 in April 2023 to encourage greater pension saving.

The annual allowance applies to the combined total of:

• Your personal contributions (including any made through salary sacrifice)
• Your employer's contributions
• Any third-party contributions (for example, from a family member)

It's important to understand that the annual allowance is not a limit on how much you can pay in — you can physically contribute more than £60,000. Rather, it's the threshold above which you lose tax relief and face a tax charge on the excess.

How tax relief works within the allowance

When you contribute to a pension within your annual allowance, you receive tax relief at your marginal rate. For a basic-rate taxpayer (20%), every £80 you pay in is topped up to £100 by the government. Higher-rate (40%) and additional-rate (45%) taxpayers can claim back the additional relief through their Self Assessment tax return.

This tax relief is one of the most powerful incentives for pension saving — but it only applies up to your available annual allowance.

Who does the Annual Allowance apply to?

The annual allowance applies to anyone who:

• Is a member of a registered pension scheme (workplace or personal pension)
• Is under age 75
• Is UK resident for tax purposes (though non-residents can also be affected)

It covers defined contribution pensions (where you build up a pot of money) and defined benefit pensions (like final salary schemes, where the calculation is more complex).

The Standard Annual Allowance: £60,000

For most people, the calculation is straightforward. Add up all contributions made to your pensions in the tax year (6 April 2026 to 5 April 2027). If the total is £60,000 or less, you're within your allowance and there's no charge.

Example: James is 42 and earns £55,000 a year

• James contributes £8,000 to his workplace pension (after basic-rate relief, so £10,000 gross)
• His employer adds £4,000
• Total pension input: £14,000

James is well within the £60,000 annual allowance. He receives full tax relief and faces no annual allowance charge.

Employer contributions count

A common misconception is that only your own contributions count toward the annual allowance. In fact, employer contributions are included in the calculation. This is important for high earners with generous employer pension schemes.

Example: Priya earns £90,000

• She salary-sacrifices £15,000 (gross) into her pension
• Her employer contributes an additional £25,000
• Total pension input: £40,000

Priya is within her £60,000 allowance, but she needs to track both her own and her employer's contributions.

The Tapered Annual Allowance (for high earners)

If you're a high earner, your annual allowance may be reduced through a mechanism called the tapered annual allowance. This affects individuals with both high income and high pension contributions.

The two income tests

To determine if the taper applies, HMRC uses two tests:

1. Threshold income test: £200,000

Your "threshold income" is broadly your net income (salary, bonuses, rental income, dividends, etc.) minus any personal pension contributions you've made. If your threshold income is £200,000 or less, the taper doesn't apply — even if your total income is higher.

This test exists to protect people who make large personal pension contributions from being unfairly caught by the taper.

2. Adjusted income test: £260,000

If you fail the threshold income test (i.e., your threshold income exceeds £200,000), HMRC then looks at your "adjusted income." This is your total income plus any employer pension contributions.

If your adjusted income exceeds £260,000, the tapered annual allowance applies.

How the taper works

For every £2 of adjusted income above £260,000, your annual allowance reduces by £1. The taper continues until your annual allowance reaches a minimum floor of £10,000.

The maximum reduction is £50,000 (from £60,000 down to £10,000), which occurs when adjusted income reaches £360,000 or more.

Example: David is a senior executive

• Salary and bonus: £280,000
• Employer pension contribution: £30,000
• Personal pension contribution: £20,000 (gross)

Threshold income: £280,000 − £20,000 = £260,000 (exceeds £200,000, so taper may apply)

Adjusted income: £280,000 + £30,000 = £310,000

Adjusted income exceeds £260,000 by £50,000.

Taper reduction: £50,000 ÷ 2 = £25,000

David's annual allowance: £60,000 − £25,000 = £35,000

Total pension input: £20,000 + £30,000 = £50,000

David has exceeded his tapered allowance by £15,000 and will face an annual allowance charge on this excess.

The Money Purchase Annual Allowance (MPAA): £10,000

If you've started taking money from a defined contribution pension flexibly — for example, through flexi-access drawdown or taking an uncrystallised funds pension lump sum (UFPLS) — you trigger the money purchase annual allowance (MPAA).

Once triggered, your annual allowance for future money purchase (defined contribution) contributions drops to £10,000 for 2026-27. This is a lifetime restriction designed to prevent people from recycling tax-free cash back into pensions.

What triggers the MPAA?

The MPAA is triggered when you:

• Take flexible withdrawals from a drawdown arrangement
• Take an UFPLS payment
• Receive a flexible annuity payment

It is not triggered by:

• Taking your 25% tax-free lump sum and buying an annuity with the rest
• Taking small pension pots under the small pots rules
• Receiving a serious ill-health lump sum

Example: Linda, aged 58

Linda has a pension pot of £200,000. She takes her 25% tax-free cash (£50,000) and moves the remaining £150,000 into drawdown. She withdraws £8,000 in the first year.

By entering drawdown and taking flexible income, Linda has triggered the MPAA. Her annual allowance for future defined contribution pensions is now £10,000 (not £60,000).

If Linda's employer contributes £12,000 to her pension the following year, she'll have exceeded the MPAA by £2,000 and will face a tax charge.

MPAA and defined benefit pensions

The MPAA only applies to money purchase (defined contribution) schemes. If you continue to accrue benefits in a defined benefit scheme after triggering the MPAA, those benefits are still tested against the full annual allowance (or tapered annual allowance if applicable), not the £10,000 MPAA.

Carry Forward: using unused allowance from previous years

If you exceed your annual allowance in the current year, you may be able to use carry forward to avoid or reduce the tax charge. Carry forward allows you to bring forward unused annual allowance from the previous three tax years, as long as you were a member of a registered pension scheme in those years.

How carry forward works

You use the current year's allowance first, then carry forward unused allowance from the earliest year first (three years ago, then two years ago, then last year).

Example: Robert in 2026-27

• 2023-24: contributed £25,000 (unused allowance: £35,000)
• 2024-25: contributed £30,000 (unused allowance: £30,000)
• 2025-26: contributed £40,000 (unused allowance: £20,000)
• 2026-27: contributes £95,000

Current year allowance: £60,000 (used fully)

Excess: £35,000

Carry forward from 2023-24: £35,000 (covers the full excess)

Robert has no annual allowance charge because he can carry forward enough unused allowance from previous years.

Important carry forward rules

• You must have been a member of a registered pension scheme in the years you're carrying forward from (even if you made no contributions)
• Carry forward is only available for the previous three tax years
• If the MPAA applies, you can only carry forward unused MPAA from previous years (not the full annual allowance)
• The tapered annual allowance in previous years affects how much you can carry forward

What happens if you exceed your Annual Allowance?

If your total pension input exceeds your available annual allowance (including any carry forward), you face an annual allowance charge. This charge is calculated at your marginal income tax rate and is payable through Self Assessment.

The charge effectively claws back the tax relief you received on the excess contributions.

Example: Sophie is a higher-rate taxpayer (40%)

She exceeds her annual allowance by £8,000.

Annual allowance charge: £8,000 × 40% = £3,200

Sophie must report this on her Self Assessment tax return and pay the charge by 31 January following the end of the tax year.

Scheme pays

If your annual allowance charge exceeds £2,000 and your pension scheme allows it, you can ask the scheme to pay the charge on your behalf under "scheme pays." The scheme pays HMRC directly, and your pension benefits are reduced accordingly.

This can be useful if you don't have the cash available to pay the charge yourself.

Common mistakes

Forgetting employer contributions count

Many people track their own contributions carefully but forget that employer contributions also count toward the annual allowance. Always include both.

Not tracking contributions across multiple schemes

If you have several pension pots (old workplace pensions, a SIPP, etc.), you must add up contributions to all of them. The £60,000 limit is a combined total.

Assuming the MPAA only applies to the pension you accessed

Once triggered, the MPAA applies to all your money purchase pensions, not just the one you took money from.

Ignoring the threshold income test

High earners sometimes assume the taper applies automatically. If you make large personal pension contributions, you may pass the threshold income test and avoid the taper entirely.

Missing the carry forward opportunity

If you exceed your allowance, always check whether you have unused allowance from the previous three years. Many people pay unnecessary charges because they don't realise carry forward is available.

Not reporting the charge

If you exceed your annual allowance, you must report it on your Self Assessment tax return, even if you've never filed one before. HMRC can charge penalties for late or missing returns.

Defined benefit pensions: a special calculation

For defined benefit (final salary) pensions, the "pension input amount" isn't simply the contributions paid in. Instead, it's calculated by:

1. Valuing the increase in your promised pension over the year
2. Multiplying that increase by 16
3. Adding any separate lump sum increase (minus inflation adjustments)

This can produce surprisingly large pension input amounts, especially in years where you receive a pay rise or promotion.

Example: Tom is in a final salary scheme

At the start of the year, his promised pension is £20,000 p.a.

At the end of the year, it's £22,000 p.a. (an increase of £2,000).

Pension input amount: £2,000 × 16 = £32,000

Even though Tom and his employer may have only contributed £10,000 in cash, his pension input for annual allowance purposes is £32,000.

What to do next

If you're approaching the annual allowance or have already exceeded it, the rules can be complex — especially if the tapered annual allowance or MPAA applies. Here's what to do:

Check your pension statements

Most pension providers send annual statements showing contributions for the tax year. Gather statements for all your pensions and add up the total input.

Calculate your position

Use HMRC's online tools or speak to your pension provider to work out whether you've exceeded your allowance and whether carry forward is available.

Report and pay any charge

If you've exceeded your allowance, you must complete a Self Assessment tax return (even if you don't normally file one). The deadline is 31 January following the end of the tax year. Consider scheme pays if the charge is over £2,000.

Plan ahead

If you're a high earner or have generous employer contributions, model your position for future years. You may need to ask your employer to reduce contributions or pay part of your bonus as salary instead of pension.

Get specialist help

The annual allowance rules interact with income tax, National Insurance, salary sacrifice, and retirement planning. For tailored advice:

• AI Tax chat: Ask specific questions about your annual allowance position and get instant, accurate answers based on your circumstances.
• AI Accountant: For end-to-end support — we'll calculate your position, complete your Self Assessment, liaise with your pension providers, and help you plan contributions for future years.

The annual allowance is one of the most important limits in pension planning. Get it right, and you maximise tax-efficient retirement saving. Get it wrong, and you face unexpected tax bills that can wipe out much of the benefit. Take the time to understand your position, and don't hesitate to ask for help if the rules feel overwhelming.