Working out an annual allowance charge

To work out an annual allowance charge, total the pension input amounts for the tax year across every registered scheme, subtract your annual allowance and any unused allowance carried forward from the previous three years, and then tax what is left as if it were the top slice of your taxable income. The charge is therefore at 20%, 40% or 45% (or the Scottish equivalents), and it can straddle more than one band.

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What do you need before you start?

Gather the following for the tax year being tested and, if you might need carry forward, the three years before it:

a pension savings statement or your own record of contributions for every scheme, including schemes that did not send one (see pension savings statements);
whether you have flexibly accessed a pension, which brings in the money purchase annual allowance;
your threshold income and adjusted income if you are a high earner; and
your taxable income for the year and the gross amount of any relief at source pension contributions and Gift Aid donations you made.

The charge is set by section 227 of the Finance Act 2004 and HMRC’s step by step method is in the Pensions Tax Manual at PTM055200 and PTM056110.

Step 1: what is the pension input amount for each scheme?

For a defined contribution pension, section 233 of the Finance Act 2004 makes the pension input amount the total contributions paid in during the year. PTM053200 says that includes contributions by you, contributions by someone else on your behalf and employer contributions. Your own contributions count gross, including the basic rate relief the scheme claims, and they count even if part of them did not attract relief. Investment growth is not included, nor are contributions paid by you or a third party after age 75.

For a defined benefit scheme the input amount is the growth in the value of your promised benefits, not what was paid in. The method, using a factor of 16 and an opening value uplifted by CPI, is on defined benefit pension input amounts. Since 2016 to 2017 every pension input period matches the tax year, so all schemes are measured over 6 April to 5 April. Add the figures for every arrangement in every scheme to get the total pension input amount.

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Step 2: what is your annual allowance for the year?

The standard annual allowance is £60,000 for 2026 to 2027 and has been since 2023 to 2024; it was £40,000 from 2016 to 2017 to 2022 to 2023. It is lower in two cases:

the tapered annual allowance applies where threshold income is over £200,000 and adjusted income is over £260,000, reducing the allowance to as little as £10,000; and
the money purchase annual allowance of £10,000 applies to money purchase savings after you have flexibly accessed a pension, with an alternative annual allowance of £50,000 for other savings.

If your total input amount is within the allowance and the money purchase annual allowance does not apply, PTM055200 confirms there is no charge and you can stop here. GOV.UK also confirms no charge arises in the year someone dies or retires and takes all their pensions because of serious ill health.

Step 3: how much carry forward can you use?

Under section 228A of the Finance Act 2004 you can add unused allowance from the previous three tax years, but only from a year in which you were a member of a registered pension scheme at some point. PTM055100 says membership includes being an active, deferred, pensioner or pension credit member. For each earlier year, unused allowance is that year’s allowance less that year’s total pension input amount. Where the taper applied in an earlier year, the reduced allowance is used, and where the money purchase annual allowance applied the alternative annual allowance is used.

The order is fixed. PTM055100 says the current year’s £60,000 is used first, then unused allowance from the earliest of the three years, then the next. Allowance not used by the end of the third year after it arose is lost. Add the current allowance and the carry forward to get your available annual allowance; the total pension input amount above it is the excess. More detail is on pension carry forward.

Step 4: at what rate is the excess taxed?

PTM056110 says to start with your reduced net income, which is your taxable income after reliefs and the personal allowance. Add the excess on top. The part of the excess that sits below the basic rate limit is charged at 20%, the part between the basic rate limit and the higher rate limit at 40%, and the part above the higher rate limit at 45%. For 2026 to 2027 in England, Wales and Northern Ireland, the basic rate covers taxable income up to £37,700 and the higher rate up to £125,140.

Two adjustments are easy to miss. PTM056120 says both limits are increased by the gross amount of any relief at source pension contributions and Gift Aid donations you made in the year. Contributions under a net pay arrangement instead reduce your taxable income. HMRC says the effect is that the charge is the same whichever method was used. For Scottish taxpayers the Scottish rates and limits apply, but the lowest rate the charge can be at is the Scottish basic rate; the starter rate does not apply.

A worked example

Illustration only, using 2026 to 2027 rates for England. Daniel earns £90,000. His employer’s net pay scheme receives £9,000 from him and £21,000 from his employer. In March he also pays £40,000 net into a personal pension, which the provider grosses up to £50,000. He has not flexibly accessed any pension and his income is well below the taper thresholds.

Total pension input amount: £9,000 + £21,000 + £50,000 = £80,000.
Annual allowance: £60,000.
Carry forward: his totals were £55,000 for 2023 to 2024, £58,000 for 2024 to 2025 and £60,000 for 2025 to 2026, so he has £5,000 and £2,000 unused. Available allowance is £67,000.
Excess: £80,000 less £67,000 = £13,000.
Reduced net income: £90,000 less the £9,000 net pay contribution is £81,000 of taxable pay. After the £12,570 personal allowance, reduced net income is £68,430.
Extended bands: the £50,000 gross relief at source contribution raises his basic rate limit from £37,700 to £87,700.
Charge: £68,430 plus the £13,000 excess is £81,430, still inside the extended basic rate band, so the whole excess is charged at 20%: £2,600.

If Daniel had ignored the band extension he would have put the whole excess at 40% and overstated the charge by £2,600.

How is the charge reported and paid?

GOV.UK says the charge goes in the “Pension savings tax charges” section of the Self Assessment return, on form SA101 for paper returns, even if the scheme pays some or all of it. Online returns for a tax year are due by 31 January after it ends, which is also the payment deadline. You can still claim relief on contributions in the same return.

A scheme must pay the charge for you, and reduce your benefits, if you ask by 31 July in the year after the tax year ends, the charge is more than £2,000, and your input amount in that scheme alone exceeded the standard annual allowance. In Daniel’s case neither scheme exceeded £60,000, so he cannot require either to pay, although a scheme may agree to pay voluntarily. See scheme pays.

What mistakes come up most often?

Using net rather than gross relief at source contributions in the input amount.
Forgetting employer contributions, or contributions paid by a relative.
Carrying forward from a year in which you were not a member of any registered scheme.
Using the latest year’s unused allowance first instead of the earliest.
Charging the whole excess at your top rate without adding it to reduced net income and checking where it falls.
Forgetting to extend the bands for relief at source contributions and Gift Aid.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.