The annual allowance is the most that can be saved into registered pension schemes in a tax year with the benefit of tax relief before a tax charge applies. For 2026 to 2027 it is £60,000, set by section 228 of the Finance Act 2004, although it is lower for some high earners and for people who have flexibly accessed a pension. Savings above the available allowance, after any carry forward, are taxed at the saver’s marginal rate as the annual allowance charge.

What does the annual allowance actually limit?

The annual allowance is not a cap on how much can be paid into a pension. HMRC’s Pensions Tax Manual at PTM051100 is clear that there is no limit on the amount of pension savings an individual can make each year; the limit is on the tax relief. Relief is still given when the money goes in, and the annual allowance charge then claws back, in broad terms, the relief on the part of the year’s savings that exceeds the allowance.

A separate rule limits relief on the member’s own contributions to the higher of 100% of UK relevant earnings or £3,600 gross. The two tests work independently: a contribution can be within the earnings limit and still exceed the annual allowance, or the other way round. For the wider picture on relief for directors and the self employed, see pension contributions and tax relief for business owners.

The allowance applies to the total of all registered pension schemes a person belongs to, not to each scheme separately. It also covers overseas schemes where the member or employer has had UK tax relief. Savings in a UK scheme that is not registered, such as an employer financed retirement benefits scheme, do not count.

How much is the allowance, and when is it lower?

HMRC’s pension schemes rates page gives these standard amounts:

Tax year Standard annual allowance
2026 to 2027 £60,000
2025 to 2026 £60,000
2024 to 2025 £60,000
2023 to 2024 £60,000
2016 to 2017 up to 2022 to 2023 £40,000

Two rules can cut the figure. People with threshold income over £200,000 and adjusted income over £260,000 have a tapered annual allowance, which can fall to £10,000. People who have flexibly accessed a defined contribution pot, for example by drawing taxable income from flexi access drawdown, are subject to the money purchase annual allowance of £10,000 for further defined contribution saving. Unused allowance from the previous three tax years can be added on top, under the carry forward rules.

What counts towards the annual allowance?

The legislation calls a year’s savings the “pension input amount”, measured over a pension input period that has matched the tax year (6 April to 5 April) since 2016 to 2017. How it is measured depends on the type of scheme.

Defined contribution pensions

For personal pensions, SIPPs and most workplace schemes, the input is the total gross contributions paid in the tax year by the member, the employer and anyone else on the member’s behalf. That includes the basic rate relief added by the provider under relief at source, so a net personal payment of £8,000 counts as £10,000. Employer contributions paid under salary sacrifice count in full as employer contributions; see salary sacrifice schemes.

Defined benefit pensions

For final salary and career average schemes, contributions are irrelevant. The input is the growth in the value of the promised benefits. HMRC’s guidance values the pension at 16 times the annual pension built up, plus any separate lump sum, at the end of the year, and compares it with the opening value uprated by the Consumer Prices Index for the previous September. A large pay rise combined with long service can produce a large input even if the member’s own contributions are modest.

What does not count

Under section 229 of the Finance Act 2004 there is no pension input amount for the tax year in which the member dies, and none for an arrangement where the member becomes entitled to benefits because of severe ill health. PTM051200 also explains a limited exemption for deferred members whose benefits only rise within set limits.

How is the annual allowance charge calculated?

Section 227 of the Finance Act 2004 imposes the charge on the “chargeable amount”, which is the excess over the available allowance. The excess is treated as sitting on top of the person’s taxable income (their reduced net income after Step 3 of section 23 of the Income Tax Act 2007), and is charged at the basic, higher or additional rate according to where it falls. Scottish taxpayers use the Scottish rates and Welsh taxpayers the Welsh rates. The chargeable amount is not itself treated as income for other tax purposes.

Illustration only. Jo is a higher rate taxpayer with no unused allowance from earlier years. In 2026 to 2027 her employer pays £50,000 into her personal pension and she pays £20,000 gross. Her input is £70,000, so £10,000 is over the £60,000 allowance. If her income plus that £10,000 stays within the higher rate band, the charge is £4,000 (£10,000 at 40%). If part of the excess pushed her over the higher rate limit, that part would be charged at 45%.

How do you report and pay the charge?

The charge is reported in the “Pension savings tax charges” section of the Self Assessment return, which is on the SA101 additional information pages for paper filers; see Self Assessment supplementary pages. GOV.UK says this must be completed even if the pension scheme pays all or part of the tax. Someone who does not normally file a return must register so that HMRC can issue one.

Schemes must send a pension savings statement automatically when a member’s input in that scheme exceeds the annual allowance, by 6 October after the end of the tax year (PTM167100). Members of several schemes should ask each for figures, because no single scheme sees the full total. If the figures are not available by the filing date, PTM056200 says to use a reasonable estimate, tick the estimate box and amend the return when the final figure arrives. No report is needed if savings are within the allowance, or above it but fully covered by carry forward.

Members should still claim any higher rate relief on their contributions through the return. The charge offsets that relief; it does not replace the claim.

Can the pension scheme pay the charge instead?

Under “Scheme Pays” in sections 237A to 237E of the Finance Act 2004, a member can require a scheme to pay some or all of the charge in return for a reduction in their benefits. According to PTM056410 two conditions must both be met: the member’s annual allowance charge for the year exceeds £2,000, and their pension input in that particular scheme exceeds the standard annual allowance, ignoring any taper or money purchase annual allowance. The scheme can only be made to pay the charge on the excess within that scheme.

The notice must normally reach the scheme by 31 July in the year after the one in which the tax year ended (PTM056430), so a charge for 2025 to 2026 needs a notice by 31 July 2027. The deadline comes forward if the member is about to take all their benefits from the scheme. Where the conditions are not met, some schemes agree to pay voluntarily, but the member remains liable to HMRC.

What mistakes come up most often?

  • Counting only personal contributions and forgetting employer payments or defined benefit growth.
  • Using the net amount paid under relief at source rather than the gross figure.
  • Assuming that a large one off employer contribution is fine because the company gets a deduction. The deduction and the annual allowance are separate questions, and large employer payments may also need their relief spread; see spreading large pension contributions.
  • Overlooking the taper because salary alone is below £200,000, when dividends, rental income or post 2015 salary sacrifice push threshold income over it.
  • Taking taxable money from a drawdown pot or an uncrystallised funds lump sum and continuing to save at the old level, not realising the £10,000 money purchase annual allowance now applies.
  • Leaving the charge off the return because Scheme Pays was elected.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.