What Is the Pension Annual Allowance?

The pension yearly allowance — formally called the Annual Allowance — sets the maximum you can contribute to pensions in a tax year while still receiving full tax relief. Most people will never get close to it. For high earners or those making large one-off contributions, the pension yearly allowance is worth knowing precisely, because exceeding it triggers a tax charge at your marginal rate.

The standard Annual Allowance

The pension yearly allowance — the Annual Allowance — for 2025/26 is £60,000. This is also the pension maximum contribution limit that attracts tax relief in a single tax year.

This is not just your own contributions. It covers:

Your personal contributions
Your employer's contributions
The tax relief added by the government

All of these across all your pension schemes, added together, must not exceed £60,000 in the tax year.

If the total exceeds £60,000, the excess is added to your income for the year and taxed at your marginal rate. The tax charge effectively strips out the advantage you would have received on that portion.

What counts toward the £60,000

Your contributions

Employer’s contributions

Tax relief

£60,000

Your contributions

Employer’s contributions

Tax relief

All three sources, across all your pension schemes combined.

What counts as a pension input

For defined contribution pensions, the calculation is simple: every pound paid in from any source counts toward the allowance.

For defined benefit pensions, the calculation is more complex. The "pension input" is based on the growth in the value of your accrued benefit over the year, multiplied by a standard factor of 16. A £1,000 increase in accrued annual pension equates to a £16,000 pension input. This is where Annual Allowance surprises tend to come from — particularly for public sector workers in generous DB schemes. A modest salary increase that bumps up years of accrued pension can generate a significant pension input without any obvious connection to what you contributed.

Carry forward

If you haven't used your full Annual Allowance in any of the previous three tax years, and you were a member of a registered pension scheme in each of those years, you can carry the unused portion forward.

Carry forward allows you to make a larger contribution than the standard £60,000 in a single year, potentially useful after receiving a bonus, selling a business, or a period of lower earnings where pension contributions were reduced.

The unused allowance from three years ago expires at the end of the current tax year. The oldest year's allowance is used first.

One constraint: your contributions in the current year cannot exceed your earnings in that year (or £3,600, whichever is higher), even with carry forward.

A note on the pension lifetime allowance: before April 2024 there was a separate pension lifetime allowance that capped the total value of your pension savings. That no longer exists. The Annual Allowance controls how much you can put in each year; there is no longer any limit on how large your pot can grow.

The tapered Annual Allowance for high earners

For those with high incomes, the standard £60,000 allowance is reduced.

The taper works on two income tests, both of which must be met for the taper to apply.

Threshold income must exceed £200,000. Threshold income is broadly your taxable income, not adjusted for pension contributions.

Adjusted income must exceed £260,000. Adjusted income adds employer pension contributions (and certain salary sacrifice amounts) back to threshold income.

If both conditions are met, the Annual Allowance reduces by £1 for every £2 of adjusted income above £260,000. The minimum tapered allowance is £10,000.

A worked example:

Adjusted income of £280,000. Taper reduction: (£280,000 - £260,000) ÷ 2 = £10,000. Tapered Annual Allowance: £60,000 - £10,000 = £50,000.

Adjusted income of £350,000. Taper reduction: (£350,000 - £260,000) ÷ 2 = £45,000. Tapered Annual Allowance: £60,000 - £45,000 = £15,000 (still above the £10,000 floor).

Adjusted income of £360,000 or above: allowance is at its minimum of £10,000.

An important point on salary sacrifice: sacrificing salary after 8 July 2015 is added back in the threshold income calculation. It doesn't reliably help you avoid the taper if you're already close to the £200,000 threshold.

The tapered allowance in plain terms

Adjusted income Below £260,000£60,000 allowance

Adjusted income £280,000£50,000 allowance

Adjusted income £360,000 or above£10,000 allowance

For every £2 of adjusted income above £260,000, you lose £1 of allowance.

The Money Purchase Annual Allowance

Once you have flexibly accessed a defined contribution pension — typically by taking income from a flexi-access drawdown fund, or taking an UFPLS payment — the Money Purchase Annual Allowance (MPAA) applies to future DC contributions.

The MPAA for 2025/26 is £10,000.

This replaces the standard £60,000 allowance for DC contributions. It exists to prevent the recycling of pension funds: someone takes money out, claims tax relief by putting it back in, takes it out again. The MPAA removes the financial incentive to do that.

The MPAA only applies to defined contribution pensions. If you're also in a DB scheme, you can still accrue DB benefits normally up to the overall Annual Allowance, subject to the "alternative annual allowance" calculation that HMRC sets out.

Critically: once triggered, the MPAA cannot be reversed. If you're still working and plan to continue contributing more than £10,000 a year to DC pensions, the timing of when you start drawing income matters considerably.

One trigger, permanent consequence

Before flexible access

Annual Allowance for DC contributions: £60,000

After any drawdown income or UFPLS

Annual Allowance for DC contributions: £10,000

This cannot be reversed.

Still working and contributing more than £10,000 a year? The timing of when you start drawing income matters.

Scheme Pays

If you face an Annual Allowance charge, you don't have to find the money personally to pay it. A mechanism called Scheme Pays allows you to ask your pension scheme to pay the charge on your behalf, with a corresponding reduction to your pension.

The reduction is permanent. Your pension is worth less in retirement by the amount needed to cover the charge plus a notional adjustment for investment returns foregone.

Mandatory Scheme Pays is available where the charge is over £2,000 and the pension input to the relevant scheme exceeded the Annual Allowance. Voluntary Scheme Pays may be available in other circumstances, at the scheme's discretion.

Using Scheme Pays avoids a cash outflow now but reduces your retirement income. Whether that trade-off is worth it depends on your immediate cash position and how much you're likely to draw from that specific scheme in retirement.

Key takeaway: The Annual Allowance is £60,000 for 2025/26, covering total contributions from all sources across all your pensions. The taper catches high earners from £260,000 adjusted income, and the MPAA of £10,000 kicks in the moment you start flexibly drawing from a DC pension. If any of these limits are relevant to you, the order and timing of contributions and withdrawals matters.

Frequently asked questions

What is the pension Annual Allowance for 2025/26?

The Annual Allowance is £60,000 for 2025/26. This covers all pension contributions in a tax year — yours, your employer's, and tax relief — across all your pension schemes combined. Contributions above this limit face a tax charge at your marginal rate.

What is the tapered Annual Allowance?

For high earners, the standard £60,000 Annual Allowance is reduced. If your adjusted income exceeds £260,000 and your threshold income exceeds £200,000, the allowance is cut by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000.

What happens if I exceed the Annual Allowance?

The excess above the Annual Allowance faces an annual allowance charge, taxed at your marginal Income Tax rate. The charge is reported through Self Assessment. You can ask your pension scheme to pay the charge on your behalf through "Scheme Pays", though this reduces your pension value.

What is carry forward for pensions?

Carry forward lets you use unused Annual Allowance from the previous three tax years. If you've been a member of a registered pension scheme in those years but contributed less than the allowance, you can add the unused portion to this year's limit and make a larger contribution.

What is the Money Purchase Annual Allowance?

Once you've flexibly accessed a defined contribution pension — through drawdown income, UFPLS, or certain other routes — the Money Purchase Annual Allowance (MPAA) of £10,000 applies to future DC contributions. It prevents pension funds being recycled back into the system after being accessed.