The Pension Annual Allowance, Explained
Most people never hit it. Higher earners and senior public-sector staff hit it without noticing.
The annual allowance caps how much can go into your pensions each year with tax relief. It tapers for high earners and drops sharply once you have flexibly accessed a pot. Unused allowance can sometimes be carried forward.
What the allowance covers
The annual allowance caps how much can go into your pensions each tax year with tax relief. It counts everything: your contributions, your employer's, and tax relief. For defined-benefit schemes it is based on the increase in the value of your promised pension, not on cash paid in, which is why public-sector workers can breach it without contributing a penny more.
Tapering for high earners
Above a certain level of income the allowance reduces, down to a much smaller floor. Because it is driven by total income including employer contributions, a bonus or a promotion can trigger it unexpectedly. People affected often find out through a tax charge rather than in advance.
We are not pension advisers. We introduce you to one who is, and the introduction costs you nothing.
The allowance that shrinks once you start drawing
Take taxable income flexibly from a defined-contribution pension and the Money Purchase Annual Allowance applies from then on, cutting what you can contribute sharply. Taking only tax-free cash does not normally trigger it. This catches people who dip into a pension while still working.
Carry forward
Unused allowance from the previous three tax years can often be carried forward, provided you were a member of a pension scheme in those years. It is the main tool for anyone with a one-off spike in income who wants to make a large contribution without a charge.
Why a pay rise can produce a tax bill
In a defined-benefit scheme the allowance is measured against the growth in your pension entitlement. A significant pay rise increases that entitlement across all your service at once, which can produce a large deemed contribution in a single year. Senior clinicians and long-serving public-sector staff are among those affected, and the charge is often the first they hear of it.
A worked example: The pay rise that produced a tax bill
A senior clinician receives a significant pay rise. In a final-salary scheme the annual allowance is measured against the growth in the pension promised to her, not the cash paid in.\nBecause the rise increases her entitlement across all her years of service at once, the deemed contribution for that single year is large enough to breach the allowance, producing a tax charge on income she never received in cash. She contributed nothing extra and did nothing wrong.
Figures are illustrative and rounded, used to show how the rule works. Your own numbers will differ.
A second example: Using carry forward properly
Tom sells part of his business and wants to make a large pension contribution in one year, well above the annual allowance.\nBecause he has been a scheme member throughout and contributed modestly for the previous three years, carry forward lets him use that unused allowance alongside the current year's. The contribution goes in without a charge. Had he not been a scheme member in those years, none of it would have been available.
At a glance
| Which allowance | When it applies |
|---|---|
| Standard annual allowance | Most people, most years |
| Tapered allowance | Higher earners, reduced as income rises |
| Money Purchase Annual Allowance | Once you take taxable income flexibly from a DC pot |
| Carry forward | Unused allowance from the previous three years |
Common mistakes
- Assuming it only counts what you pay in; employer contributions and tax relief count too.
- In a final-salary scheme, forgetting it is measured on the growth in your promised pension.
- Dipping into a pension while still working and triggering the MPAA.
- Discovering a breach through a tax charge instead of checking in advance.
We are introducers, not pension advisers. We put you in front of someone who is, and it costs you nothing.
What to do next, in order
- Add up all contributions including your employer's.
- If you are in a defined-benefit scheme, ask for your pension input amount.
- Check whether tapering applies to your income level.
- Look at carry forward before making a large one-off contribution.
Key terms, in plain English
- Annual allowance
- The cap on how much can go into your pensions each tax year with tax relief, counting your contributions, your employer's and tax relief together.
- Money Purchase Annual Allowance
- A much lower annual contribution limit that applies once you take taxable income flexibly from a defined-contribution pension.
- Carry forward
- Using unused annual allowance from the previous three tax years to make a larger contribution without a charge.
- Tapered annual allowance
- A reduced allowance applying to higher earners.
- Pension input amount
- The measure of how much your pension grew in a year, used to test the allowance in defined-benefit schemes.
Who this affects most
This affects high earners, anyone who has already drawn taxable income from a pension, and members of defined-benefit schemes receiving significant pay rises. Senior clinicians and long-serving public-sector staff are among those who can breach it without contributing an extra penny.
Check broadband before you make an offer
Broadband speeds can vary street by street, so check the exact address before you commit. Ofcom's free checker shows which broadband speeds and mobile coverage are available at any UK property.
Want all your bills in one?
We can introduce you to a specialist who can combine your mobile, broadband and utilities into one bill. There's no fee for the introduction.
We don't provide these services ourselves. Switching household bills is not a regulated financial service, so FCA protections and the Financial Ombudsman do not apply. We'll only pass your details to the specialist if you ask us to. See our privacy notice.
Common questions
What is the annual allowance?
The cap on how much can go into your pensions each tax year with tax relief. It counts your contributions, your employer's, and tax relief together.
How does it work for a final-salary pension?
It is based on the increase in the value of your promised pension over the year, not on cash paid in. That is why public-sector staff can breach it without contributing more.
What is tapering?
Above a certain income the allowance reduces, down to a much lower floor. Because it is driven by total income including employer contributions, a bonus or promotion can trigger it unexpectedly.
What is the Money Purchase Annual Allowance?
A much lower limit that applies once you take taxable income flexibly from a defined-contribution pension. Taking only tax-free cash does not normally trigger it.
Can I use unused allowance from earlier years?
Often yes. Carry forward lets you use unused allowance from the previous three tax years, provided you were a pension scheme member in those years.
How do I know if I have breached it?
Your scheme must give you a pension savings statement if your input exceeds the standard allowance. If you have several schemes, you may need to add them together yourself.
What happens if I exceed it?
A tax charge applies on the excess. In some cases the scheme can pay it on your behalf in exchange for a reduction in your benefits, known as scheme pays.
Does the allowance apply to the State Pension?
No. It applies to private and workplace pension savings only.
What is scheme pays?
An arrangement where your pension scheme settles an annual allowance charge on your behalf in exchange for reducing your future benefits. It is useful when the charge is large and you do not have the cash.
Do I need to tell HMRC myself?
If you exceed the allowance across all your schemes you are responsible for reporting it through self assessment, even if no single scheme has told you. Schemes only have to notify you if their own input exceeds the standard allowance.
Does the allowance apply if I stop working?
The allowance still applies to any contributions made, and there is a limit on how much you can contribute with tax relief when you have little or no earnings. Check the current figure before paying in.
Where to check the official figures
Pension figures change every tax year. These are the free, official sources. Check the current number before you act on anything here.
- Check your State Pension forecast, GOV.UK
- Check your National Insurance record, GOV.UK
- Pension Tracing Service, GOV.UK
- MoneyHelper, pensions and retirement
- The FCA Register, check any firm
Where to go next
- Combining pensions: our main guide
- The NHS Pension Scheme explained
- The LGPS explained
- The Teachers’ Pension Scheme explained
The bottom line
Most people never come close to the annual allowance. The ones who do are high earners, anyone who has already taken taxable income from a pension, and members of defined-benefit schemes who receive a significant pay rise, because the allowance is measured against the growth in the promised pension rather than cash paid in. That last group frequently discovers the problem through a tax charge on income they never received. If any of those describes you, ask your scheme for your pension input amount, check whether tapering applies, and look at carry forward before making a large contribution.
Want someone to look at your actual pensions?
Tell us what you hold. We will introduce you to a regulated pension adviser who can tell you whether anything is worth moving. If it is not, they will say so.
Talk it through with usWhatsApp us
Open Monday to Saturday, 9am to 8pm
We do not provide pension advice and we are not pension advisers. We introduce you to a carefully selected, FCA-regulated pension adviser. The introduction costs you nothing. If you go ahead, we may be paid a fee by that firm. Pension rules and figures change, and what is right depends on your own circumstances.