What Happens If I Contribute More Than My Annual Allowance

At Towerstone, we specialise in higher rate pension tax relief advice and have written this article for people making large contributions. The purpose of this article is to explain what happens if you exceed allowance and how charges work, helping you make informed decisions.

From experience, this is one of the most misunderstood pension rules in the UK, and it often catches out exactly the people who are trying to do the right thing. High earners, professionals, NHS consultants, senior managers, business owners, and people having a one off good year often find themselves asking this question only after the contribution has already been made. In my opinion, the annual allowance is one of the least intuitive parts of the pension system, and the consequences of breaching it are rarely explained clearly at the point contributions are made.

The short answer is that you are not banned from contributing more than the annual allowance, and you do not lose the pension money you have paid in. However, you may face an annual allowance tax charge that effectively claws back the tax relief on the excess. From experience, this is where panic often sets in, but in reality the situation is usually manageable once it is understood properly.

In this article I will explain clearly and practically what the annual allowance is, what happens if you exceed it, how the tax charge works, how it is reported and paid, and what options you have to reduce or manage the impact. Everything here reflects real world UK pension practice and aligns with the rules administered by HM Revenue and Customs.

This is intentionally detailed. In my opinion, the annual allowance is not about punishment. It is about limiting tax relief, and once you understand that, the fear largely disappears.

First, what is the annual allowance?

The annual allowance is the maximum amount of pension growth that can benefit from tax relief in a single tax year.

It applies to total pension input, not just what you personally pay in.

This means it includes:

• Your own pension contributions

• Employer pension contributions

• The value of pension growth in defined benefit schemes

From experience, many people assume it only applies to what they personally contribute. That assumption is often the root of the problem.

The standard annual allowance

For most people, the standard annual allowance is a fixed amount each tax year.

This allowance applies across all your pensions combined.

If your total pension input for the year stays within the allowance, there is no issue.

If it exceeds the allowance, the excess may be subject to a tax charge.

Why the annual allowance exists

In my opinion, it helps to understand the policy intent.

The annual allowance exists to:

• Limit how much tax relief any one person can receive

• Prevent very large one off pension funding purely for tax reasons

• Maintain fairness across income levels

It is not there to stop you saving for retirement. It is there to stop unlimited tax relief.

Once you see it in that light, the rules make more sense.

What counts towards the annual allowance?

This is where things get technical, and where many people get caught out.

The annual allowance looks at pension input, not cash paid.

Defined contribution pensions

For defined contribution pensions, this part is straightforward.

Your pension input is:

• The total gross amount paid into the pension in the tax year

This includes:

• Your own contributions

• Employer contributions

• Contributions paid via salary sacrifice

From experience, people often forget to include employer contributions when estimating their position.

Defined benefit pensions

This is where things become far less intuitive.

For defined benefit pensions, such as NHS, Teachers’, or final salary schemes, the pension input is not what you pay in.

Instead, it is calculated based on:

• The increase in the value of your promised pension over the year

• Adjusted by a statutory factor

This means:

• A pay rise

• Extra service

• Promotion

• Clinical excellence awards

Can all push you over the annual allowance even if your personal contributions have not changed.

From experience, this is why public sector professionals are so often affected.

Why people breach the annual allowance without realising

From experience, the most common triggers are:

• A promotion or pay jump

• A large bonus

• Backdated pay awards

• Employer contribution increases

• Defined benefit accrual spikes

• Having multiple pensions

In many cases, the individual has done nothing unusual or aggressive. The breach happens quietly in the background.

What happens if you exceed the annual allowance?

This is the key point.

If you exceed the annual allowance, you do not lose the pension money.

Instead:

• The excess over the allowance is identified

• That excess is added to your taxable income

• You pay an annual allowance tax charge

The charge is designed to remove the tax advantage on the excess contribution.

How much is the annual allowance tax charge?

The tax charge is not a flat penalty.

It is charged at your marginal rate of income tax.

This means:

• Basic rate taxpayers pay 20 percent on the excess

• Higher rate taxpayers pay 40 percent

• Additional rate taxpayers pay 45 percent

From experience, this is often misunderstood as a penalty. It is better thought of as tax relief being reclaimed.

A simple example

Let me explain this with a simple example.

Imagine your annual allowance is £60,000 and your pension input for the year is £75,000.

That means you have exceeded the allowance by £15,000.

If you are a higher rate taxpayer:

• £15,000 is added to your taxable income

• You pay tax on it at 40 percent

• The tax charge is £6,000

You keep the £15,000 in your pension. You simply lose the tax relief on it.

From experience, this is far less catastrophic than people initially fear.

What if I cannot afford the tax charge?

This is a very real concern, particularly for defined benefit members.

You may have a tax charge but no cash contribution to match it.

In these cases, you may be able to use Scheme Pays.

What is Scheme Pays?

Scheme Pays allows your pension scheme to pay the annual allowance tax charge on your behalf.

In return:

• Your future pension benefits are reduced

• The reduction is calculated actuarially

• You avoid paying the tax personally now

From experience, Scheme Pays is most commonly used in NHS and other public sector schemes.

In my opinion, it is not perfect, but it is often necessary.

When Scheme Pays is available

There are two types of Scheme Pays.

Mandatory Scheme Pays applies when:

• The charge exceeds a certain threshold

• The excess arises within that scheme

Voluntary Scheme Pays may be offered even if mandatory conditions are not met.

From experience, the rules are detailed and scheme specific, so professional guidance is often helpful here.

What if I do nothing?

Ignoring an annual allowance breach is not advisable.

If you exceed the allowance:

• You must report it

• HMRC expects it to be declared

• Interest and penalties can apply if it is missed

From experience, HMRC does not usually penalise honest mistakes, but silence is treated very differently from disclosure.

How do I report an annual allowance charge?

The annual allowance charge is reported through your Self Assessment tax return.

You must:

• Declare the excess pension input

• Calculate the tax charge

• Indicate whether Scheme Pays is being used

Even if you do not normally complete Self Assessment, breaching the annual allowance can bring you into it.

What about carry forward?

This is one of the most important mitigating rules.

Carry forward allows you to use unused annual allowance from the previous three tax years.

This can dramatically reduce or eliminate an annual allowance charge.

From experience, many people breach the allowance but still owe no tax once carry forward is applied.

How carry forward works in practice

You can add together:

• Your current year allowance

• Plus any unused allowance from the previous three years

As long as you were a member of a registered pension scheme in those years.

From experience, carry forward is often the difference between panic and relief.

A realistic carry forward example

Imagine you exceeded the annual allowance by £20,000 this year.

If you had:

• £10,000 unused allowance last year

• £10,000 unused allowance the year before

Then:

• The excess is fully covered

• No annual allowance charge arises

From experience, this is very common, particularly for people with variable income.

What about the tapered annual allowance?

This is where things become more complex.

High earners may have their annual allowance reduced, sometimes significantly.

This is known as the tapered annual allowance.

From experience, this catches out people who are nowhere near thinking of themselves as ultra high earners.

How tapering works in simple terms

If your income exceeds certain thresholds, your annual allowance may be reduced.

This can bring the allowance down dramatically.

From experience, this is a major issue for senior professionals, particularly in the NHS.

In my opinion, tapering is one of the most poorly understood parts of pension tax.

What if I breach the allowance repeatedly?

Repeated breaches are not illegal.

However:

• They may indicate pension saving is no longer tax efficient

• Planning becomes more important

• Alternative strategies may be needed

From experience, some people accept the charge deliberately because pensions still make sense for other reasons.

Is it ever worth exceeding the annual allowance?

In my opinion, sometimes yes.

Even after paying the annual allowance charge, pension saving can still be attractive because:

• Employer contributions may still make it worthwhile

• Investment growth remains tax sheltered

• Inheritance tax advantages still apply

From experience, the decision should be based on net outcomes, not fear of the charge.

Common mistakes I see repeatedly

From experience, the most common errors include:

• Assuming employer contributions do not count

• Ignoring defined benefit pension growth

• Forgetting to use carry forward

• Missing reporting deadlines

• Panicking and stopping pension saving unnecessarily

In my opinion, panic is the most expensive mistake.

Practical steps I recommend from experience

If you think you may have exceeded the annual allowance, I recommend:

• Asking your pension scheme for pension input amounts

• Checking unused allowance from prior years

• Calculating carry forward properly

• Assessing whether Scheme Pays is available

• Reporting the position accurately

These steps usually replace fear with control.

The emotional side of annual allowance breaches

I want to acknowledge something important.

People often feel punished or unfairly targeted when they first encounter the annual allowance charge.

From experience, that reaction is normal.

In my opinion, reframing it as a tax relief limit rather than a penalty helps enormously.

So what happens if I contribute more than my annual allowance?

You keep the pension money.
You may lose some or all of the tax relief on the excess.
You may pay an annual allowance tax charge.
You may be able to use carry forward or Scheme Pays to manage it.

It is rarely a disaster, and it is often manageable.

Key Takeaways

From experience, breaching the annual allowance is not a sign of failure or recklessness. It is often a sign of success, promotion, or long service in a generous scheme.

In my opinion, the real mistake is not exceeding the allowance. The real mistake is not understanding what happens next.

If there is one takeaway, it is this. The annual allowance does not stop you saving for retirement. It simply limits how much tax relief you receive. Once you understand that, you can make calm, informed decisions rather than reacting in fear.

If you would like to explore related pension guidance, you may find What happens if my workplace pension does not give higher rate relief and What is higher rate pension tax relief and how does it work useful. For broader pension guidance, visit our pensions knowledge hub.