The Pension Annual Allowance, Explained Without Jargon

The annual allowance is the ceiling on how much can go into your pensions each tax year while still getting tax relief. For most people it is £60,000 — high enough that most never think about it. But two groups genuinely need to pay attention: high earners, and anyone who has already started drawing pension money flexibly. Here is how it works in plain terms.

What counts towards the £60,000

Everything going into your pensions in the tax year: your contributions, the tax relief added to them, and — the bit people forget — your employer's contributions. For defined benefit schemes it is the growth in the value of your promised benefits (your scheme calculates this for you). How the relief itself works is covered in our tax relief guide.

One more overall cap: your own personal contributions also cannot exceed 100% of your earnings for the year and still get relief (non-earners can contribute up to £3,600 gross).

Trap one: the taper for high earners

Above roughly £260,000 of "adjusted income" (broadly, total income plus employer pension contributions), the allowance shrinks by £1 for every £2 over the line, down to a floor of £10,000. The calculation has moving parts, and people near the thresholds — especially with bonuses or one-off income — are the classic accidental breachers. If that is you, this is a genuinely good use of an accountant.

Trap two: the MPAA

Flexibly access any defined contribution pension — take more than just the 25% tax-free lump sum — and your allowance for future contributions drops permanently to the Money Purchase Annual Allowance of £10,000, with no carry forward. This catches people who dip into a pension at 55 while still working and paying in: the dip is legal, but it slashes what they can rebuild. Check how withdrawals are taxed and the early access rules before touching anything.

The rescue rule: carry forward

Contribute more than £60,000 in one year — a bonus, an inheritance, a good self-employed year — and unused allowance from the three previous tax years can absorb the excess, provided you were a pension scheme member in those years and (for personal contributions) have the earnings to support it this year. Carry forward is what makes large one-off pension contributions possible without a tax charge.

If you do go over

An annual allowance charge claws back the tax relief on the excess via self-assessment — effectively the excess is added to your taxable income. Larger charges can sometimes be paid from the pension itself ("scheme pays"). Going over is not illegal, just usually pointless, which is why the fix is almost always planning contributions before year-end rather than repairing afterwards. For deciding how much to contribute in the first place, see how much to put in your pension.

This is general information, not personalised financial advice. Rules and allowances change, and your right decision depends on your own circumstances — for anything that affects your money long-term, it is worth checking the current figures on GOV.UK or speaking to a regulated financial adviser (MoneyHelper offers free, impartial guidance).