The pension annual allowance, and the two tests that reduce it

You can put £60,000 into pensions this tax year before a tax charge applies, counting everything: your contributions, the tax relief on them, and whatever your employer adds. High earners get less, but only if they pass two separate income tests rather than one, and the salary sacrifice most people reach for to get under the first test is added straight back in.

What counts towards it

Everything, which is the bit that trips people up. The allowance is not a limit on what you pay in, it is a limit on what goes in.

For a defined contribution pension that means your own contributions plus the tax relief added to them, plus anything your employer pays, plus anything a third party pays on your behalf, across every scheme you have. Someone contributing £20,000 gross with an employer adding £25,000 has used £45,000 of the allowance, not £20,000.

For a final salary scheme there is no cash amount to count, so what counts is the increase in the value of your benefits over the year. That has an awkward consequence covered further down: a promotion can use up your allowance without you paying in a penny more.

There is no charge at all if you retired and took all your pension pots because of serious ill health, or in the year of death.

The other limit people confuse it with

There are two caps and they do different jobs. Conflating them is the most common mistake on this topic.

The annual allowance of £60,000 caps everything going in, from you and from your employer.

The earnings limit caps how much of your own contributions can get tax relief, at the higher of 100% of your UK taxable earnings and £3,600 a year.

Two things follow. Someone with no earnings at all can still pay in £2,880 a year and have it grossed up to £3,600 with basic-rate relief, which is how contributions for a non-working spouse or an adult child work. And an employer can pay in more than you earn, because employer contributions are not caught by the earnings limit at all, though they still count against the £60,000.

One more, worth knowing if you are retired and still saving: a pension is not classed as earnings, so pension income creates no headroom under the earnings limit.

The taper, and its two gates

High earners get a smaller allowance, but the test is not simply "do you earn a lot". There are two income measures and both have to be over their limit before anything happens.

Threshold income must be over £200,000. Broadly it is your income excluding pension contributions, which is why it is the gate that protects people whose high adjusted income is mostly employer pension contributions.

Adjusted income must be over £260,000. This one adds pension contributions, including your employer's, back in.

If either is under its limit, you keep the full £60,000. Somebody with adjusted income of £400,000 and threshold income of £200,000 is untouched, which a lot of explanations get wrong by describing the taper as a single income test.

Once both gates are passed, here is the whole taper.

Assumes threshold income is also above £200,000, because otherwise none of this applies. The allowance falls by £1 for every £2 of adjusted income above £260,000 and stops falling at £10,000, which it reaches at £360,000.

Why salary sacrifice does not help

This is the single most useful thing on the page, because it is the exact move people make to get under the threshold income gate and it has not worked for a decade.

gov.uk's method for working out threshold income has five steps, and the fourth is to add back any reduction in employment income for pension provision through a salary sacrifice arrangement made after 8 July 2015. The fifth does the same for flexible remuneration arrangements.

So sacrificing £30,000 of salary into a pension lowers the salary on your payslip and leaves your threshold income exactly where it was. If you were at £230,000 before, you are at £230,000 for this test afterwards.

The date matters. The rule bites on arrangements made after 8 July 2015, which by now is almost all of them. If you have a genuinely older arrangement that has run continuously, it is worth checking rather than assuming.

Carrying forward three years

If you did not use your full allowance in the last three tax years, you can use the unused part now. For 2026/27 that means 2023/24, 2024/25 and 2025/26, all of which had a £60,000 allowance, so the theoretical maximum is £180,000 carried forward and £240,000 in total.

Four things about it that are worth knowing before you plan around it. Unused allowance is used earliest year first, so the oldest year drops off as time passes. You do not report carry forward to HMRC, it simply means no charge arises. You must have been a member of a registered scheme in each year you carry from, though you did not have to contribute in it. And the earnings limit still applies in the year you actually pay, so a personal contribution of £240,000 needs £240,000 of earnings that year, which is why very large catch-up contributions are usually made by a company rather than an individual.

What going over costs

There is no penalty and no fine. The excess is added to your taxable income and taxed at whatever rate it then falls into, which cancels out the relief you got and should not have. That means the same excess costs different people different amounts.

The annual allowance charge, 2026/27, rest of UK. The excess stacks on top of your other income, so a large one can run through more than one band.

You report the excess on your Self Assessment return. Where the charge is large, the scheme can sometimes pay it out of your pension for you, which reduces your eventual benefits rather than your bank balance. That is worth asking your scheme about rather than reading about, because the conditions and deadlines are specific to each case.

For a Scottish taxpayer the charge works the same way, except the lowest rate that can apply is the Scottish basic rate rather than the starter rate.

The allowance that drops to £10,000

Once you take taxable money flexibly out of a defined contribution pension, what you can put back in drops from £60,000 to £10,000, for that year and every year afterwards. It is called the Money Purchase Annual Allowance and it does not reverse.

Taking only your tax-free lump sum does not trigger it. Neither does trivial commutation, a small lump sum, or an annuity that cannot decrease. Taking income from drawdown does, and so does any withdrawal with a taxable part.

Two details that are usually left out. You cannot use carry forward against the £10,000, so there is no way to make up for it later. And it does not wipe out the rest of your allowance: an alternative allowance of £50,000 continues to apply to defined benefit saving and to money you had in defined contribution schemes before you accessed them.

Your provider has to send you a flexible access statement within 31 days of the first time you trigger it, so if one arrives, that is what it means. The tax-free lump sum guide goes into which withdrawals trigger it and which do not.

Final salary schemes

A defined benefit scheme has no pot, so there is no contribution figure to measure. What counts instead is how much the value of your promised pension grew over the year.

The consequence catches people entirely by surprise: a significant pay rise or a promotion increases the value of every year of service you have already built up, which can produce a large increase in one year and a tax charge without you having chosen to do anything at all. It is most common among long-serving members of public sector and other final salary schemes who get a substantial promotion late in their career.

If that might be you, the figure you need is the pension input amount, which your scheme calculates and reports. Ask for it rather than trying to derive it, because the valuation method is specific and getting it slightly wrong moves the answer a long way.

To model what contributions do to a pot over time, the pension calculator runs the projection, and how pensions work covers tax relief on the way in. If you are weighing salary against contributions, the salary sacrifice calculator shows the tax and National Insurance effect, with the caveat above about threshold income.

Common questions

What is the pension annual allowance for 2026/27?

£60,000. That covers everything going into all your pensions in the year: your own contributions including the tax relief added to them, anything your employer puts in, and anything a third party pays on your behalf. For a final salary scheme it is the increase in the value of your benefits rather than a cash amount.

Does salary sacrifice reduce my threshold income?

Not if the arrangement started after 8 July 2015. gov.uk's method for working out threshold income adds salary sacrificed for pension provision straight back in. This catches people out because sacrificing salary is exactly what someone does to try to get under the £200,000 gate, and for any modern arrangement it does not work.

How does the tapered annual allowance work?

Two conditions have to be met, not one. Your adjusted income has to be over £260,000 AND your threshold income over £200,000. If either is below its limit your allowance stays at the full £60,000. Once both are passed, the allowance falls by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000 which it reaches at £360,000.

How much can I carry forward?

Unused allowance from the three previous tax years, so for 2026/27 that is 2023/24, 2024/25 and 2025/26. Each had an allowance of £60,000, so the theoretical maximum is £180,000 carried forward, or £240,000 with this year included. You have to have been a member of a registered pension scheme in each year you carry from, though you do not have to have contributed.

What happens if I go over the annual allowance?

The excess is added to your taxable income and taxed at whatever rate it then falls into, which claws back the relief you should not have received. It is not a flat penalty. A £10,000 excess for someone on a £60,000 salary costs £4,000; the same excess for an additional-rate taxpayer costs £4,500. You report it on your Self Assessment return, and in some cases the scheme can pay it for you.

Is the annual allowance the same as the 100% of earnings limit?

No, and mixing them up is the most common error on this topic. The annual allowance caps everything going in from every source, including your employer. The earnings limit caps the amount of your own contributions that can get tax relief, at the higher of your UK earnings and £3,600 gross. Someone with no earnings can still put in £2,880 a year and have it grossed up to £3,600.

Does taking money from my pension reduce my annual allowance?

Taking only the tax-free lump sum does not. Taking taxable money flexibly does: it triggers the Money Purchase Annual Allowance, which cuts what you can pay into defined contribution pensions to £10,000 a year permanently, and you cannot use carry forward against it. Your other pension saving keeps an alternative allowance of £50,000.

Is this article financial advice?

No. It sets out the published 2026/27 allowances and rules and shows what they come to, with the sums worked by our own tested engine. The taper in particular depends on precise definitions of your income that are worth getting a professional to check. Speak to a regulated adviser or an accountant before acting on it.

About this article

Written by the calcd team. We build UK money calculators and explain the numbers behind them in plain English. The allowances come from HMRC's published pension rates, the taper and the definitions of threshold and adjusted income from gov.uk's guidance on working out a tapered annual allowance, carry forward from gov.uk on unused allowances, and how the charge is worked out from HMRC's Pensions Tax Manual. The taper and charge tables are worked at page load by our own tested engine. Figures are estimates for the 2026/27 tax year and are not financial or pension advice. Last updated September 2026.