Pension Annual Allowance Explained

Who this guide is for: For UK savers, employees and company directors who need a plain-English overview of annual allowance, taper, carry forward and the money purchase annual allowance — not personalised pension advice or a full HMRC calculation.

The annual allowance is the limit on how much pension saving can benefit from the normal registered-pension tax rules in a tax year (6 April to 5 April) before an annual allowance tax charge may arise. For most people in 2026/27 that standard limit is £60,000.

The test is usually about your pension input amount across all relevant pensions — not simply the cash you personally paid from your bank. Employer contributions can count. High earners can have a lower tapered annual allowance. Accessing a defined contribution pension flexibly can bring in a separate money purchase annual allowance (MPAA). Unused allowance from earlier years may sometimes be carried forward.

Your annual allowance applies across your private pensions for the tax year. How pension input is measured depends on the type of scheme.

For defined contribution pensions, the figure that matters is usually the gross contribution. Under relief at source, if you pay £80 from net pay and the provider adds £20 basic-rate tax relief, £100 typically counts toward the annual allowance.

For defined benefit schemes, HMRC measures growth in promised benefits (often using a factor of 16 on the pension built up, with adjustments). That calculation is scheme-specific — use your pension savings statement rather than trying to reverse-engineer it here.

These are related but different limits.

• The annual allowance limits pension input before an annual allowance charge may arise. Employer contributions count.
• Personal tax relief on your own contributions is generally limited to 100% of your relevant UK earnings for the tax year (with a small £3,600 gross pathway for some people with little or no earnings under relief at source).

Do not assume that a £60,000 annual allowance means you can personally contribute £60,000 from earnings and automatically receive tax relief on all of it. Someone with £40,000 of relevant earnings does not get personal tax relief on a £60,000 personal contribution merely because the annual allowance is £60,000. Employer contributions can still use annual allowance headroom even where personal earnings would limit personal relief. See Pension Tax Relief Explained.

If this year's pension input is more than this year's annual allowance, you may be able to carry forward unused annual allowance from the previous three tax years. For 2026/27, those earlier years are 2025/26, 2024/25 and 2023/24.

Key points:

• You generally need to have been a member of a UK registered pension scheme (or qualifying overseas scheme) in the earlier year to carry unused allowance from that year.
• You do not need to have made a contribution in that earlier year — unused allowance is what was left after that year's pension input, which can be the whole allowance if input was nil.
• Use this year's allowance first, then earlier unused amounts from oldest to newest.
• The allowance available in an earlier year can itself have been tapered, so do not assume every earlier year always had £60,000 available.
• Unused money purchase annual allowance cannot be carried forward.

High earners can have a reduced tapered annual allowance. For the current tax year, both of the following must be true before taper reduces the allowance:

• Threshold income over £200,000
• Adjusted income over £260,000

In plain English, threshold income is a measure of your income after certain deductions, including relief-at-source personal pension contributions. Adjusted income broadly adds pension contributions — including employer contributions — back when assessing whether you are a high earner for taper purposes. The official definitions are detailed; use HMRC's tapered annual allowance guidance for complex pay, bonuses, trusts or overseas relief.

Where taper applies, the standard £60,000 allowance falls by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000. Someone with adjusted income of £360,000 or more (and threshold income above £200,000) is at that £10,000 floor.

The money purchase annual allowance (MPAA) is a separate £10,000 limit on defined contribution pension saving after you have flexibly accessed a defined contribution (or certain overseas) pension. Your provider should send a flexible access statement when it first applies.

Common trigger examples include:

• taking income (or a short-term annuity) from a flexi-access drawdown fund
• taking an uncrystallised funds pension lump sum (UFPLS)

Not every pension payment triggers the MPAA. In particular, taking a pension commencement lump sum (the familiar tax-free lump sum taken when benefits are crystallised) does not, on its own, usually trigger the MPAA. Small pot / trivial commutation payments also sit outside the usual trigger list. Always check the exact payment type with your scheme.

Carry forward cannot be used to increase the MPAA above £10,000. Where MPAA applies and defined contribution input exceeds it, a reduced alternative annual allowance (normally £50,000, or your tapered allowance minus £10,000) can apply to other pension savings such as defined benefit growth. That interaction is complex — use HMRC's flexible-access guidance if both MPAA and defined benefit saving apply.

Company-paid employer pension contributions for a director still count toward that individual's annual allowance. They are not limited by the director's salary in the same way as personal contribution tax relief. Corporation Tax deductibility is a separate company question — contributions generally need to be wholly and exclusively for the trade.

Read Employer Pension Contributions Explained for the company-side picture. The Director Salary and Dividend Calculator can model an employer pension cost in an extraction plan, but it does not assess annual allowance, taper, carry forward or MPAA.

Exceeding the annual allowance does not automatically mean the contribution is invalid, returned by the provider, or taxed in full as if it never entered the pension.

Instead, after available current-year allowance and any usable carry forward, the excess can create an annual allowance tax charge. That charge is designed broadly to remove the tax advantage on the excess. You normally report it in the pension savings tax charges section of a Self Assessment tax return — even if your scheme pays some or all of it.

Scheme Pays lets a pension scheme pay some or all of the charge in return for a reduction in your benefits, where scheme and HMRC conditions are met (including charge-size and timing rules). Voluntary scheme pays may also be available. Confirm the process with your scheme administrator.

These examples use round figures for 2026/27. Assumptions are stated with each example. They are planning illustrations, not HMRC computations.

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