Understanding your pension annual allowance

Pensions and retirement
Views & insights

Find out what the pension annual allowance is, what happens if you exceed it, and how carry forward and taper rules work.


13 February 2024 | 3 minute read

Making the most of your pension annual allowance is a great way of giving your retirement savings a tax-efficient boost. But complex rules around how each individual’s allowance is calculated mean many people risk exceeding the limit and facing a surprise tax bill.

Figures from HMRC show the number of people who reported pension contributions exceeding their annual allowance soared from just 5,460 in 2015/16 to 53,330 in 2021/22. Meanwhile, the total value of contributions exceeding the allowance rocketed from £143m to £1.2bn1.


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Knowing how much your pension annual allowance is and how to manage it effectively is essential to avoiding unexpected tax charges. A financial adviser can offer advice on your individual circumstances but, in the meantime, here are some of the key considerations.

What is the pension annual allowance?

The pension annual allowance is the maximum amount you can save into your pensions in any one tax year without having to pay a tax charge.

For most people, the standard annual allowance is £60,000. However, you can only receive tax relief on up to 100% of your UK relevant earnings; if you’re under 75 and you earn, say, £30,000, you’ll be entitled to tax relief on contributions up to that amount. Tax relief on pension contributions ceases at age 75.

The way your pension savings are measured against the annual allowance depends on the type of pension you have. For defined contribution (DC) pensions, it includes your personal pension contributions (including tax relief) and any contributions made on your behalf by someone else, including your employer, in the tax year. For defined benefit (DB) pensions, it’s based on the increase in your pension savings over that year.

What happens if I exceed it?

If you exceed the annual allowance, you’ll have to pay an annual allowance charge which essentially claws back any tax relief received on the excess contribution. The rate of charge you’ll pay will depend on the tax band(s) that your income plus the excess contribution fall into. For example, a higher-rate taxpayer who exceeds their annual allowance by £10,000 would pay a charge of £4,000 (£10,000 x 40%).

Can I avoid charges using carry forward?

If you’ve exceeded your annual allowance, you might be able to reduce or avoid charges by using ‘carry forward’. This enables you to carry forward unused annual allowances from the previous three tax years, as long as you’ve been a member of a registered pension scheme in those three years and you’ve used up your full annual allowance in the current tax year.

Carry forward can be a really useful way of reducing or eliminating inadvertent tax charges, as well as maximising any annual allowances you didn’t fully use in recent years. However, the rules are complex, so it’s important to seek advice.

Why might my annual allowance be lower?

Although most people have an annual allowance of £60,000, there are a couple of instances where it could be lower.

The first is based on an assessment of your income. If your ‘adjusted income’ is more than £260,000 a year and your ‘threshold income’ is more than £200,000 a year, your annual allowance reduces by £1 for every £2 of excess adjusted income. This is known as the annual allowance taper. The taper continues until you reach the minimum tapered allowance of £10,000, which you would do if your adjusted income is £360,000 or more. The process for calculating your adjusted and threshold incomes can be complicated; to find out if the taper affects you, make sure you speak to an adviser.

The second reason why your annual allowance might be lower is if you’ve flexibly accessed your DC pension – for example, you’ve started to draw an income or take lump sums (other than the tax-free cash lump sum). Doing so triggers the money purchase annual allowance (MPAA), which limits the amount of contributions you can make to DC pensions while still receiving tax relief to £10,000. If you’re retired and considering returning to work, it’s worth exploring whether you might be subject to the MPAA and, if so, how to manage this. Bear in mind that you can’t use carry forward to make contributions above the MPAA.

Is it ever worth exceeding the annual allowance?

If you’re nearing or have exceeded your annual allowance and you can’t use carry forward, stopping your pension contributions won’t always be the right decision. In some instances, you could be better off paying the charge, especially if you receive generous employer contributions that would cease if you stopped paying into your pension.

A financial adviser can help you evaluate your options, explore the use of other tax-efficient savings vehicles such as ISAs, and explain the immediate and longer-term implications of each course of action. By getting some advice, you’ll feel confident you’ve made the right decisions for you.

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

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