The pension annual allowance

The pension annual allowance is the most you can save into your pension in a tax year before a tax charge applies. For most people it is £60,000¹, a figure set in legislation for the tax year 2023-24 and each subsequent tax year². The allowance covers contributions from you, your employer and anyone else, plus the tax relief added, and it applies across all your private pensions rather than to each pot separately³.

Going over the allowance does not stop the money going into your pension. What happens instead is that a tax charge, at your income tax rate, is applied to the excess. You report it to HMRC through self-assessment, and in some cases you can ask your pension scheme to pay the charge out of your pot, a facility known as scheme pays³.

Two things can reduce the headline £60,000. If your income is high enough, the allowance is tapered down, potentially to as little as £10,000⁴. And once you start taking money from your pension flexibly, a separate reduced limit, the money purchase annual allowance, applies to further savings into defined contribution pensions⁵.

The annual allowance: £60,000 a year for most people

The annual allowance is the amount of pension saving that can benefit from tax relief in a single tax year before a charge applies. MoneyHelper, the government-backed guidance service, puts it plainly: the annual allowance is £60,000 for most people¹. The figure is set in legislation: the annual allowance for the tax year 2023-24 and each subsequent tax year is £60,000². The same £60,000 annual allowance limit appears in the government's published rates and allowances⁹.

The allowance is a limit on how much pension saving receives favourable tax treatment, not a limit on how much you can physically pay in. There is no rule stopping you from contributing more than £60,000, but the maximum you will receive tax relief on is £60,000 or 100% of your salary, whichever is lower¹⁰. Beyond that, an annual allowance tax charge applies to the excess.

The tax year that the allowance runs over is the same as the income tax year, running from 6 April to 5 April¹¹. Each 6 April the allowance resets, and a fresh £60,000 becomes available for most people.

The allowance applies to all private pensions you have, if you have more than one³. It is not £60,000 per pot: someone with a workplace pension, an old employer scheme and a personal pension has one allowance shared across all of them. The allowance covers all contributions to your pension made by you, your employer or anyone else, and includes tax relief³. This is why large employer contributions, for example when a business owner pays into their own pension via the company, count towards the same limit as personal contributions.

For most people the allowance is generous relative to what they actually save. Auto-enrolment minimum contributions are far below £60,000, so the limit mainly bites on higher earners, people making large one-off contributions, and members of defined benefit schemes whose benefits have grown sharply. The guides to pension tax relief and workplace pensions cover how contributions and relief work day to day.

What counts towards the allowance, and what does not

The annual allowance is measured on your pension input amount: the total value of pension saving that goes into your pensions during the tax year. For most people this is straightforward. Your annual allowance covers all contributions to your pension made by you, your employer or anyone else, and includes tax relief³. So a personal contribution, an employer contribution under a workplace scheme, a contribution from a spouse or partner, and the tax relief added by the government all count towards the same allowance.

The allowance applies across all your private pensions, not per pot⁷. If you contribute to a workplace pension and a personal pension in the same tax year, both sets of contributions, plus anything your employers pay in, count together.

What does not count is just as important. The allowance is a limit on new pension saving, so it does not measure the value of your existing pot. In a defined contribution pension, the pension input amount is based on the contributions paid in, not on investment growth, so a good year for your investments does not eat into your allowance. In a defined benefit scheme the position is different, and the allowance is applied to the increase in the value of your pension during a tax year³. That is covered in full later in this page.

The State Pension does not count towards the annual allowance at all. The allowance applies to private pension saving: workplace schemes, personal pensions and SIPPs. Nor does the value of benefits you have already built up in earlier years, or transfers between pension schemes, which have their own rules.

Your earnings cap what you can pay in with tax relief

Alongside the annual allowance, there is a second limit that is often the binding one for ordinary earners: your contributions must be less than, or equal to, the amount you earn¹². Most people can contribute up to £60,000 or 100% of their earnings, whichever is lower, each tax year while claiming tax relief⁶. So someone earning £30,000 can get tax relief on at most £30,000 of contributions in that tax year, even though the annual allowance is £60,000.

The earnings cap is described consistently across independent sources. The maximum you will receive tax relief on is £60,000 or 100% of your salary per year, whichever is lower¹⁰, and you can contribute up to £60,000 a year, or your total earnings if lower, and still receive tax relief¹³. Pension Wise, the government's free guidance service, states the two conditions together: your contributions must be less than or equal to the amount you earn, and contributions from you and your employer must be less than £60,000¹².

If you have no earnings, you can still get tax relief on contributions up to £3,600 a year⁷. This lower limit is what makes pensions possible for people who are not working, including children whose parents or grandparents pay into a pension for them. The page on pension tax relief without earnings covers this in more detail.

For higher earners the earnings cap rarely bites, because the annual allowance itself is what limits them, either through the taper or simply because £60,000 is less than they could otherwise save. The interaction matters most in the middle: someone earning between £3,600 and £60,000 is limited by their earnings, not by the allowance.

Carry forward: using unused allowance from the previous three tax years

If you have not used all of your annual allowance in recent years, you can carry the unused amount forward. You can make use of any unused annual allowance you might have left over from the previous three tax years³. This is possible by carrying forward any unused allowances from the previous three tax years⁴. The rules require that you were a member of a pension scheme during those years, even if you were not paying into it¹⁴.

Carry forward matters most for people whose pension saving is lumpy: a self-employed person making a large contribution after a good year, someone selling a business, or an employee receiving a one-off employer contribution. Without carry forward, a single large contribution could breach the £60,000 allowance and trigger a charge. With it, unused allowance from up to three earlier tax years absorbs the excess.

The order of use is fixed. You use the current year's allowance first, then the oldest of the three carry forward years, then the next oldest, then the most recent. Each earlier year's allowance is only available to the extent it was unused in that year, after that year's own saving.

Carry forward can also mean you avoid the annual allowance charge altogether. If you have not used all of your annual allowance in the last three tax years, you may not have to pay the charge¹⁵. The dedicated guide to pension carry forward works through the calculation with examples.

The tapered annual allowance for adjusted income over £260,000

High earners have a lower allowance. If your adjusted income is over £260,000 and your threshold income is over £200,000 in the current tax year, the tapered annual allowance applies to you⁸. The government raised the adjusted income threshold for the tapered annual allowance from £240,000 to £260,000, with effect from 6 April 2023¹⁶, a change made in legislation by substituting £260,000 for £240,000¹⁷.

The taper works by reducing your annual allowance below £60,000 once both income tests are met. For a high earner with adjusted income of more than £260,000, the annual allowance could be as little as £10,000⁴. The two income measures matter: threshold income is broadly your income before pension contributions, and adjusted income includes the value of pension contributions made for you, including employer contributions. This is why the taper can catch people whose salary alone is below the threshold but whose employer pension contributions push their adjusted income over £260,000.

The thresholds have changed over the years, which matters for anyone reviewing old contributions or recalculating past charges. From 2023/24 onwards, the tapered annual allowance applies if an individual's threshold income exceeds £200,000 and their adjusted income exceeds £260,000. From 2020/21 to 2022/23, the adjusted income threshold was £240,000, and from 2016/17 to 2019/20 it was £150,000¹⁸.

If you earn more than a certain amount you will have a reduced, tapered allowance¹⁹, so anyone with income approaching these levels may want to check their position before making a large contribution. The narrow guide to the tapered annual allowance covers the income tests in detail.

Money purchase annual allowance: £10,000 once you access your pension flexibly

Once you start taking money from your pension flexibly, the amount you can keep paying into defined contribution pensions falls sharply. The limit falls to £10,000 a year when you access your pension flexibly, which includes taking a taxable lump sum or using pension drawdown⁵. The same £10,000 limit, known as the money purchase annual allowance or MPAA, applies once you access your pension via an uncrystallised funds pension lump sum (UFPLS) or drawdown²⁰. The £10,000 figure is set in legislation, which raised the MPAA from £4,000²¹.

The trigger is flexible access, not taking your pension at all. Taking only your tax-free lump sum does not trigger the MPAA, nor does buying an annuity. What triggers it is withdrawing beyond the 25% tax-free lump sum, which reduces the amount you can pay into a pension each year while still getting tax relief from £60,000 to just £10,000²².

Two features of the MPAA catch people out. First, if you have triggered the MPAA it cannot be undone²³. A single flexible withdrawal permanently reduces your allowance for money purchase saving from that tax year onwards. Second, if you have triggered the money purchase annual allowance, you cannot carry forward any unused allowances from previous years³. So the carry forward rules described earlier stop working for the savings the MPAA applies to.

The MPAA exists to stop people recycling money they have already taken out of a pension back in for the tax relief. In practice it mainly affects people who take some pension money while still working and contributing, for example someone in drawdown who remains in a workplace scheme. The narrow guide to the money purchase annual allowance covers the triggers and exceptions.

Defined benefit pensions are measured differently

In a defined benefit or final salary scheme, nobody pays contributions into a pot, because there is no pot. What you have is a promise of a pension based on your salary and service. So the annual allowance cannot be measured on contributions paid in. Instead, the annual allowance is applied to the increase in the value of your pension during a tax year³.

This increase is called your pension input amount. It is worked out by comparing the value of the pension you have built up at the start of the pension input period with its value at the end, and the growth between the two is what counts against your allowance. A large pay rise, a promotion, or a period of high inflation-linked revaluation can produce a big increase in the value of your promised benefits, and that growth can use up allowance even though no cash contribution was made.

This is why the annual allowance charge has historically fallen on senior public sector workers, whose public sector scheme benefits can grow quickly in cash terms late in a career. The McCloud remedy for public service pensions has its own rules for recalculating past annual allowance charges, and if you paid an annual allowance charge affected by the remedy, you may be due compensation or a repayment of tax²⁴.

Taking benefits early also changes the value of a defined benefit pension. Many schemes reduce the annual rate of pension by five per cent for each year if a pension is taken early, before the scheme's normal retirement age²⁵. That reduction affects the pension you receive, not the allowance itself, but it is part of how the value of defined benefit benefits is adjusted around the time benefits are taken.

The annual allowance charge if you go over

If the pension savings made by you or your employer are more than the annual allowance, you will be charged an annual allowance tax charge¹⁵. The charge exists to claw back the tax relief given on saving above the limit: if you build up more than a certain amount in your pension in any one year, you may have to pay a tax charge, and the measure includes contributions from your employer²⁶.

The charge is worked out on the amount by which your total pension saving exceeds your available allowance for the year, after any carry forward. The excess is taxed at your marginal income tax rate or rates, because the relief given on the excess is being reversed. Someone whose excess falls into the additional-rate band pays additional-rate tax on that portion of the excess.

You are responsible for working out whether you have gone over. Where the member exceeds their annual allowance, it must be reported to HMRC through self-assessment¹⁸. You will need to fill out a self-assessment tax return to confirm how much of your pension contributions exceed the annual allowance³. If you do not normally file a tax return, exceeding the annual allowance is a reason you may need to register for self-assessment.

To do the calculation you need your pension input amounts for the tax year and, if you are using carry forward, for the three years before. You can ask your scheme or provider for a pension savings statement. HMRC's guidance on checking unused annual allowances explains how to review your pension savings for earlier years⁸.

Scheme pays: settling the charge from your pension

You do not have to pay the annual allowance charge out of your own pocket. If you have a tax charge of more than £2,000, you have the option for this to be paid from your pension savings³. This facility is called scheme pays, and all registered pension schemes must offer it²⁷.

Scheme pays is compulsory for a scheme, meaning the scheme cannot refuse a valid request, only where two conditions are met: the charge must be at least £2,000, and the total annual pension savings in the scheme for the tax year that the charge relates to must exceed the annual allowance, ignoring the MPAA and the tapered annual allowance for this purpose¹⁸. If your saving went over because of the taper or the MPAA, or the excess is spread across several schemes, the scheme is not obliged to accept the request, though it may choose to.

The deadline matters. You must notify your scheme by 31 July in the year following the end of the tax year in question²⁷. For example, a member who wants their scheme to pay their annual allowance charge for the 2024 to 2025 tax year must tell the scheme by 31 July 2026¹⁸.

The cost of scheme pays is not free money. The scheme pays HMRC on your behalf and then recovers the amount from your pension, so your benefits are reduced to cover the charge. What you gain is cash flow: the tax bill is settled now and the reduction falls on your future pension. Whether that is better than paying the charge yourself depends on the scheme's terms and your circumstances, and free guidance from Pension Wise or MoneyHelper can talk through the position.

Members of public service pension schemes affected by the McCloud remedy have an additional route: where a remedy election changes an annual allowance charge, HMRC may refund tax you paid directly, or send details to your scheme so that your pension benefits are increased after review²⁴.