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Phil Thomas
Senior Technical Support Consultant

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Annual allowance

Published  04 February 2026
   17 min read

Understanding how much can be saved into a pension each year is essential for effective retirement planning. The annual allowance sets the maximum amount that can be paid into or accrued across all pension arrangements before facing a potential tax charge. This article explains how the annual allowance works, how pension input amounts are calculated across different types of pension, the circumstances in which a charge applies, and how rules such as carry forward, the tapered allowance and the money purchase annual allowance apply.

Key facts

  • The annual allowance is the total amount you can contribute to, or accrue within, all pension schemes each tax year before being subject to a tax charge, with the standard limit currently set at £60,000.
  • Tax relief is separate from the annual allowance and applies to personal contributions up to the higher of £3,600 or 100% of relevant UK earnings.
  • The pension input amount (PIA) represents the total contributions to defined contribution schemes, or the increase in value of benefits for defined benefit and cash balance schemes, within a pension input period (PIP).
  • A PIP runs from the date contributions start (or benefit accrual begins) to the next 5 April, and thereafter aligns with the tax year.
  • Annual allowance charge - any PIA over the annual allowance triggers a tax charge designed to remove the excess tax relief received.
  • No annual allowance charge applies if the individual dies, takes benefits due to severe ill‑health, or is a deferred member whose benefits do not increase beyond specified levels.
  • You can use unused annual allowance from the previous three tax years to reduce or avoid an annual allowance charge.
  • Two alternative limits may apply: the Money Purchase Annual Allowance (MPAA) of £10,000, and the Tapered Annual Allowance, which can reduce the allowance to as low as £10,000 for high earners.

What is the annual allowance?

The annual allowance is an overall limit how much can be paid into or accrued by an individual in their pensions each tax year without being subject to a tax charge.

It is sometimes called the annual pension allowance or just pension allowance.

Tax year

Annual allowance
2026/27 £60,000
2025/26 £60,000
2024/25 £60,000
2023/24 £60,000
2022/23 £40,000
2021/22 £40,000

 

Is the annual allowance the same as tax relief?

No, as previously stated, the annual allowance is a cap on how much can be paid into or accrued by an individual into their pensions each tax year.

Tax relief is the amount the government adds to contributions an individual (or a third party) pays into a pension plan. Tax relief is limited on personal gross contribution to the higher of £3,600 per year of 100% of relevant UK earnings.

Employers receive corporation tax relief on their pension contributions and these don’t count towards the individual’s 100% of relevant UK earnings limit.

Member pension contributions tax relief and the annual allowance 

Company and employer contributions and tax relief

What is a pension input amount (PIA)?

For money purchase (defined contribution) plans

  • it is the total pension contributions made by the individual, their employer, a company or a third-party in a tax year that is tested again the annual allowance.

For cash balance and defined benefit/final salary plans

  • it is the total increase in the benefits in these types of plans in a tax year that is tested again the annual allowance.

Examples of How to calculate a PIA are shown below.

It is the PIA that is tested against the annual allowance that applies in the tax year in question. Where the PIA exceeds the annual allowance the excess amount is subject to an annual allowance tax charge.

What is a pension input period?

The pension input period (PIP) is the period that the amount of PIA is calculated.

The PIP lasts from the day the first regular or single contribution is paid to the plan and runs to the following 5 April. For cash balance or defined benefit schemes it is the day benefit accrual starts and runs to the following 5 April.

For all types of schemes they run in line with the tax year.

The pension input amount is measured against the annual allowance in force at the end of the pension input period.

What is the annual allowance charge?

The aim of the annual allowance charge is to remove the tax relief given to any pension contributions over the annual allowance.

The steps for calculating the annual allowance charge and how to pay the annual allowance charge can be found in HMRC Pensions Tax Manual - PTM056000: Annual allowance: tax charge.

Any contributions over the annual allowance must remain in the plan and an annual allowance charge paid. It’s not possible to receive a full, or partial refund of a contribution, purely to avoid the charge. Our refunds of pension contributions article talks more about when a refund of contribution can and cannot be made.

For worked examples of the annual allowance charge, see HMRC Pensions Tax manual - PTM056130: Annual allowance: tax charge: rate of tax charge: worked examples.

When does the annual allowance charge not apply?

The most obvious reason for the charge not to apply is where the PIA was less than the annual allowance for that year.

The three other situations where it does not apply are, the individual

  • dies
  • retires due to severe ill-health
  • is a deferred member of a cash balance/defined benefit scheme and their benefits do not increase beyond certain levels

This means no pension input amount will arise for pension input periods ending in the tax year in which any of these events happen.

HMRC Pensions Tax Manual - PTM053000: Pension input amounts

HMRC Pensions Tax Manual - PTM051200: When the annual allowance charge does not apply

The other reason for the charge not applying is where there is an excess over the annual allowance but the individual has unused annual allowance that they can carry forward.

What is carry forward of unused annual allowance?

The annual allowance charge may be reduced or avoided by carrying forward any unused annual allowance from pension input periods ending in the previous three tax years, which is then added to the annual allowance for the current pension input period.

More details can be found in our carry forward of pension annual allowance article.

How to calculate a pension input amount

Money purchase benefits

The total gross contributions paid in any PIP. This includes all individual, company/employer and third-party contributions. It does not include:

  • any transfer values paid into the scheme.
  • contributions paid by the individual (or a third party), after the individual has reached age 75
  • investment income or returns
  • contributions that are life assurance premium contributions that do not qualify for tax relief

Contributions that don’t attract tax relief still count towards the annual allowance (apart from contributions paid by an individual or third party on or after age 75) unless they have been refunded as a refund of excess contributions lump sum.

HMRC Pensions Tax Manual - PTM053200: Pension input amounts: money purchase arrangements

Defined benefits schemes

How do you work out how much the benefits have increased by in the PIP? The increase is the difference between the value of the individual’s benefits immediately before the start of the PIP (the opening value) and the value of the individual’s benefits at the end of the PIP (the closing value).

To calculate the opening value, take the annual pension amount at the beginning of the PIP (this is the pension that the individual would get if they retired now at normal pension age) and multiply this amount by 16. If the scheme also gives the individual a lump sum in addition to the pension (so not by commutation of pension), add this on.  The total should then be increased by the increase in CPI over the 12-month period to the September before the start of the tax year in which the annual allowance is being calculated.

To calculate the closing value, take the annual pension amount at the end of the pension input period and multiply this amount by 16. Unlike the opening value, this doesn’t have to be increased by CPI. Again, if the scheme also gives the individual a lump sum in addition to the pension (not by commutation of pension), add this on.

Take the opening value away from the closing value you have calculated above; this is the pension input amount.

The rights to be valued will include any benefits taken during the period, any rights transferred out to another registered pension scheme, and any pension debits. The value of any rights given on transfers into the scheme and any pension credits can be excluded.

As an example:

Fred has 34 years of benefits accrued in a defined benefit scheme. The scheme provides a pension of 1/60 of pensionable salary for each year of pensionable service.

His pensionable salary is £36,000. In year 35 he gets a promotion, and his new salary is £46,000. His pension input period ends on 5 April 2027.

Step 1
 Calculate the opening entitlement. This is 34/60 x £36,000 = £20,400. Add any tax-free cash that is not paid by commutation.
Step 2
 Multiply the opening entitlement by 16. £20,400 x 16 = £326,400.
Step 3
 Revalue this amount by the increase in the CPI (the consumer prices index to the September before the start of the tax year in which the pension input period ends). If CPI was 6.7%, the up-rated value would be £326,400 x 1.067= £348,269.
Step 4
 Calculate the closing entitlement. This is 35/60 x £46,000 = £26,833. Add any tax-free cash that is not paid by commutation.
Step 5
 Multiply the closing entitlement by 16. £26,833 x 16 = £429,328.
Step 6
 Calculate the difference between the revalued opening entitlement and the closing entitlement. This is £81,059 [£429,328 - £348,269].

In this example, Fred's pension input amount is over the annual allowance. He needs to tell HM Revenue & Customs (HMRC) he has exceeded the annual allowance through his self-assessment tax return. The excess will suffer an annual allowance charge that will effectively remove all tax relief on the excess. If he has any unused annual allowance from previous years this can be carried forward to remove or reduce the annual allowance charge.

HMRC Pensions Tax Manual - PTM053320: Pension input amounts: defined benefits arrangements: worked examples

Cash balance plans

The increase in the value of the individual's rights over the pension input period.

How do you work out how much the benefits have increased by in the pension input period? Like defined benefits schemes above, first you need the opening value. To calculate the opening value, you use a 2-step process' You take the amount of the promised pension fund that the individual had immediately before the start of the pension input period. You then increase this amount by the 12 month increase in the CPI to the September before the start of the tax year for which the calculation is being done.

This is then compared with the closing value, which is the amount of the individual’s promised pension fund at the end of the pension input period.

The rights to be valued will include partial benefits taken during the period, any rights transferred out to another registered pension scheme, and any pension debits. The value of any rights given on transfers into the scheme and any pension credits can be excluded.

HMRC Pensions Tax Manual - PTM053400: Pension input amounts: cash balance arrangements

Are there any other “annual allowances”?

Yes, there are two others that could apply.

Money purchase annual allowance

This reduces the amount that can be paid into a money purchase (defined contribution) plan to £10,000. For more information on how and when it applies see our article - money purchase annual allowance.

Tapered annual allowance

Where an individual has adjusted income of over £260,000, their annual allowance can be reduced, or tapered, from £60,000, potentially to as low as £10,000.

Our article, Tapering of annual allowance for high incomes - adjusted and threshold incomes, provides more detail, including the historical rates and definitions of adjusted and threshold income.

You can also find more information at HMRC: Tapered annual allowance guidance.

Is paying the annual allowance tax charge such a bad thing?

Mick Jones of The Clash famously sang “Should I stay, or should I go?” This can also apply to those thinking of leaving their pensions scheme to avoid a tax charge. Will the individual derive greater benefit from opting out and thereby avoid future charges or greater benefit from staying in the scheme and paying the charges? The value of employer contributions should not be overlooked.

Jennifer, lives in England and is a company director with a salary of £360,000. She’s a 45% taxpayer, subject to a tapered allowance of £10,000 and has no carry forward available. Her employer pays 8% as standard and contributions are matched 1 for 1 up to a further 6%. Jennifer expects to retire in 10 years’ time.

 
Employer contributions only (8%)
Employer + employee contribution (14% + 6%)
Option
 1 2
Pension input amount
 £28,800 £72,000
Annual allowance excess
 £18,800 £62,000
Annual allowance charge
 £8,460 £27,900
Post charge benefit
 £20,340 £44,100
Value of additional funds in 10 years1
 £30,108 £65,279
Net cost to Jennifer
 £0 £11,880

1Assumes 4% growth after charges.

As you can see from the table under option 1, after paying the annual allowance charge, Jennifer will generate additional funds of £20,340 at no cost to herself.

But, under option 2, if Jennifer continues to make personal contributions, she will generate additional funds of £44,100. After considering tax relief, this will only cost her £11,880.

On top of this, under option 2, as the pension input amount is greater than £60,000 and tax charge exceeds £2,000, she is eligible to make a scheme pays election.

Frequently asked questions

The annual allowance limits the amount of tax relievable pension savings that can be made by or on behalf of an individual each year. Since the 2015/16 tax year, pension input periods have been aligned with tax years. Under a money-purchase scheme this is simply the value of the contributions paid in a pension input period. However, under a defined benefit or cash balance scheme it is the increase in the value of an individual's rights over the scheme's pension input period.

Rates & Factors: Annual allowance & money purchase annual allowance

£60,000 is the standard annual allowance for most people. This is the maximum total of all pension contributions (personal, employer, and third-party) that can be made in a pension input period (usually a tax year) before an annual allowance charge applies. If an individual is subject to the money purchase annual allowance or the tapered annual allowance, this can be reduced to £10,000.

The annual allowance applies in total to all pension increases an individual may have.

See How to calculate a pension input amount above for details how these increases are valued when testing against the annual allowance. 

Yes. Individuals can carry forward unused annual allowance from pension input periods ending in the previous three tax years to the current pension input period. The annual allowance for pension input periods ending in the current tax year is £60,000.  Since the 2015/16 tax year, pension input periods have been aligned with tax years. 

It's still possible to carry forward unused annual allowance from previous years to a year where the taper applies. However, the amount of unused annual allowance available when carrying forward from a year where the taper has applied will be the balance of the tapered amount. For more information see our article tapering of annual allowance.

It's not possible to carry forward unused annual allowance to a money purchase plan subject to the money purchase annual allowance. Money purchase contributions must be limited to £10,000 to avoid an annual allowance tax charge.

Where an individual dies or takes benefits on a severe ill-health basis, no pension input amount will arise for the pension input period ending within that tax year.

HMRC Pensions Tax Manual - PTM051200: When the annual allowance charge does not apply

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.