What is the pension annual allowance?
The pension annual allowance is the amount of money you can contribute to your pension each tax year before you have to pay tax on excess contributions.
The current annual allowance is £60,000. You can add more than this amount to your pension, but any further contributions may be subject to tax.
What pension contributions count towards the pension annual allowance?
Your pension contributions for annual allowance purposes are the combined total of your employer contributions and gross personal pension contributions. It is vital to take this into account when considering your annual allowance limit.
Pension contribution allowance for high earners
Since 2016, additional rules for pension contributions have applied to high earners.
A tapered annual allowance applies if your adjusted income and threshold income exceed £260,000 and £200,000 respectively for the tax year ended 5th April 2025. This would result in your annual allowance being ‘tapered’.
If the adjusted income and threshold income limits are both exceeded, your annual allowance will reduce by £1 for every £2 of adjusted income you have earned over £260,000. The lower threshold for the tapered annual allowance is £10,000 – once you reach this threshold, your annual allowance cannot be reduced further.
If you withdraw money from your pension, either as a lump sum or through flexible retirement income, your annual allowance may also be reduced to £10,000. This is due to the Money Purchase Annual Allowance (MPAA).
Can unused annual allowances be carried forward?
Yes, both the standard and tapered annual allowances can be carried forward, provided certain conditions are met.
You can carry forward any allowance that has not been used over the past three years provided you were a member of a pension scheme in those years. If you have unused allowances from multiple years, you must use the leftover allowances in order of earliest to most recent.
What are adjusted income and threshold income?
Adjusted income and threshold income are both derived from your net income, which is the total income you receive from all sources subject to UK tax. Net income includes the value of any pension contributions that are deducted from your salary.
Essentially, adjusted income is your net income including:
- All earnings and investment income
- Employer pension contributions
- The deduction of any taxed lump sum death benefits you have received.
It is important to note that the value of pension contributions from both you and your employer are included in your adjusted income, so both can therefore impact the annual allowance you are entitled to.
Threshold income is your net income including:
- Any salary sacrifice arrangements that commenced after 8th July 2025
- The deduction of your personal pension contributions and other specific deductions, as stipulated in the Income Tax Act (ITA) 2007.
These calculations may seem straightforward, however there is a lot of debate surrounding what classifies as net income and the deductions that can be made. We strongly recommend seeking support from a tax specialist in this area to guarantee an accurate evaluation of your tax obligations regarding pensions.
Understand your pension contributions with specialist support from PKF Smith Cooper
If you think you may be affected by the tapered annual allowance or want to explore the maximum you can contribute to your pension tax-effectively, please contact us today to speak to one of our private client tax experts and gain a thorough understanding of your tax obligations.
