The rule in one sentence

Each tax year, everything paid into your pensions — your contributions, the tax relief added to them, and your employer's money — is measured against an annual allowance of £60,000 (2025/26). Stay under it and the tax advantages work as designed; go over it and HMRC claws the excess relief back through a charge. It's a ceiling on tax-advantaged saving, not a ban on saving.

What actually counts towards it

  • Defined contribution pots: the gross amount landing in the pot — your payment, the basic-rate relief added on top, and employer contributions. See how the gross-up works in the pension tax relief calculator.
  • Defined benefit schemes: not what you paid in, but how much your promised pension grew over the year, multiplied by a factor of 16 (the "pension input amount" on your statement). DB members breach the allowance more easily than they expect after a big pay rise.
  • Not counted: the State Pension, and transfers between schemes (moving a pot isn't new saving).

Separately — and this catches people out — your own contributions only earn tax relief up to 100% of your relevant UK earnings (or £3,600 gross if you earn less). That's a different ceiling from the annual allowance; the FAQ below untangles the two. Salary sacrifice contributions count as employer money for both tests.

Carry forward: the catch-up rule

If this year's contributions exceed £60,000, you can mop up unused allowance from the three previous tax years — most recent year last, current year's allowance used first. Two conditions: you must have been a member of a registered pension scheme in each year you're carrying forward from (even a dormant pot counts), and your personal contributions still can't exceed this year's earnings. Carry forward is claimed by calculation, not application — nothing to file unless you owe a charge.

The taper for high earners

Above certain incomes the allowance shrinks. If your threshold income (broadly, total taxable income minus your own pension contributions) is over £200,000 and your adjusted income (broadly, total income plus all pension build-up including employer money) is over £260,000, the allowance falls by £1 for every £2 of adjusted income above £260,000 — down to a floor of £10,000 at £360,000 or more. The two-definition test exists to stop people dodging the taper by making big personal contributions; it also means the calculation is genuinely fiddly, and one where a good accountant or adviser earns their fee.

The £10,000 MPAA trap

Flexibly take taxable money out of a defined contribution pension — even once, even a small amount — and your allowance for future DC saving drops permanently to the Money Purchase Annual Allowance of £10,000, with no carry forward. The classic casualty is someone who dips into a pot at 55 while still working and still being auto-enrolled. Taking only tax-free cash doesn't trigger it; taxable withdrawals do. If you're weighing up how to draw a pension, read retirement income options first.

If you go over

You declare the excess on self assessment and pay the annual allowance charge at your marginal income tax rate — it simply cancels the relief the excess received; it isn't a fine. If the charge tops £2,000 and the contributions went into one scheme, you can usually elect for Scheme Pays: the scheme settles the charge and reduces your pot or benefits accordingly, which beats finding the cash yourself.

Where the lifetime allowance went

The lifetime allowance was abolished in April 2024 — there is no longer a tax charge simply for having a large pension pot. What remains are limits on tax-free cash: the lump sum allowance of £268,275 across your lifetime, and a lump sum and death benefit allowance of £1,073,100. Big pots are fine; unlimited tax-free lump sums are not. (Figures are 2025/26 — check each April.)

Common questions

Do employer contributions count towards my annual allowance?
Yes — the annual allowance measures everything going into your pensions in a tax year: your contributions, the tax relief added to them, and anything your employer pays. That is different from the personal limit on tax relief, which caps only your own contributions at 100% of your earnings and ignores employer money entirely. The two ceilings are separate and frequently confused.
I earn £30,000 — can I still pay £60,000 into my pension this year?
Not personally. Your own contributions only attract tax relief up to 100% of your relevant UK earnings (£30,000 here), whatever the annual allowance says. An employer, however, can contribute above your salary — employer contributions aren't tested against your earnings, only against the £60,000 annual allowance. This is why company directors often fund pensions through the business.
What exactly triggers the £10,000 MPAA?
Flexibly taking taxable money from a defined contribution pot: drawdown income (not just moving into drawdown), a UFPLS lump sum, or certain other flexible payments. Taking only your 25% tax-free cash, buying a standard lifetime annuity, or drawing a defined benefit pension does NOT trigger it. Once triggered it is permanent, and your scheme must send you a flexible-access statement confirming the date.

Sources and further reading

GOV.UK — annual allowance · GOV.UK — carry forward calculator · MoneyHelper — tax and pensions

About this guide: general education only — not regulated advice or a personal recommendation, and FinancialAdvisor.co.uk is not an FCA-authorised firm. Allowance calculations near the taper or MPAA are exactly where paid advice tends to earn its fee; figures are 2025/26 and change. Related: tax year-end checklist and pensions explained.