What Is the Annual Allowance for Pension Tax Relief

Understanding the annual allowance

The annual allowance is the maximum amount you can contribute to all your pensions in a single tax year while still qualifying for tax relief. This includes both your personal payments and any contributions made by your employer.

For the 2025 26 tax year, the standard annual allowance is £60,000 or 100% of your earnings, whichever is lower.

For most people, this means you can contribute up to £60,000 across all pension schemes each year and still benefit from tax relief, as long as you have enough earnings to support it.

If your total contributions exceed this amount, you may have to pay an additional tax charge on the excess.

What counts towards the annual allowance

All pension contributions made during the tax year are added together to calculate whether you’ve reached the allowance. This includes:

Personal contributions that receive tax relief

Employer contributions made directly into your pension

Any contributions made through salary sacrifice

Third-party payments (for example, made by a family member on your behalf)

The total value of these combined payments cannot exceed £60,000 if you want to keep full tax relief.

How tax relief works within the allowance

You receive tax relief on contributions up to your annual allowance, based on your highest rate of income tax.

For example:

Basic rate taxpayers receive 20% relief automatically.

Higher rate taxpayers can claim an additional 20%.

Additional rate taxpayers can claim an extra 25%.

If you contribute within your allowance, your pension provider will claim the basic 20% from HMRC, and you can reclaim any extra relief through your Self Assessment or a tax code adjustment.

The carry forward rule

If you haven’t used your full annual allowance in the previous three tax years, you can carry forward the unused portion to the current year.

This allows you to make larger contributions and still receive tax relief, which can be useful if you’ve had fluctuating income or are catching up on retirement savings.

To use carry forward:

You must have been a member of a registered pension scheme in the years you’re carrying forward from.

You must use your current year’s allowance first before using previous years’.

Example

If you used only £30,000 of your £60,000 allowance last year, you can carry forward £30,000. This means you could contribute £90,000 in the current tax year (£60,000 current + £30,000 carried forward) and still receive full tax relief, provided you have the income to support it.

The tapered annual allowance for high earners

For higher earners, the standard £60,000 annual allowance may be reduced under what’s called the tapered annual allowance.

If your adjusted income (total income including employer pension contributions) exceeds £260,000, your allowance is gradually reduced.

For every £2 of income above £260,000, your allowance is reduced by £1, down to a minimum of £10,000.

This means someone earning £360,000 or more would have an annual allowance of just £10,000.

Tapered rules can be complex, so it’s important to calculate income carefully and consider employer contributions when planning how much to save.

The money purchase annual allowance (MPAA)

If you’ve already started taking money from your pension flexibly, the Money Purchase Annual Allowance (MPAA) may apply.

The MPAA reduces how much you can contribute to defined contribution pensions with tax relief each year. For the 2025 26 tax year, the MPAA is £10,000.

You trigger this reduced allowance when you:

Take an income through drawdown

Withdraw taxable cash from your pension

Take more than your 25% tax-free lump sum

Once triggered, the MPAA permanently replaces your standard £60,000 allowance for future years.

What happens if you exceed the allowance

If your pension contributions exceed your available annual allowance (including any carried forward amounts), you’ll face an annual allowance charge.

This charge effectively removes the tax relief you received on the excess amount. You can either pay it directly or, if the excess is more than £2,000, ask your pension provider to pay it from your pension pot through a process called “scheme pays.”

You’ll need to declare the excess contribution on your Self Assessment tax return.

Example

If you contributed £70,000 this year and your available allowance (including carry forward) was £60,000, you exceeded it by £10,000.

If you’re a higher rate taxpayer, you’d owe £4,000 (40% of £10,000) as an annual allowance charge.

How to make the most of your annual allowance

To maximise the benefit of pension tax relief:

Contribute regularly throughout the year to avoid large end-of-year payments.

Check your earnings and contribution levels to ensure you stay within limits.

Use carry forward if you have unused allowances from previous years.

Review your pension contributions if your income is close to £260,000 to avoid the tapered allowance unexpectedly reducing your limit.

Coordinate personal and employer contributions to make full use of available relief.

Directors of limited companies can also make employer contributions, which are not limited by personal earnings, offering further flexibility and tax efficiency.

How the allowance interacts with ISAs and other savings

Your pension annual allowance is completely separate from your ISA allowance. The ISA limit for 2025 26 is £20,000, which you can invest in addition to your pension contributions.

Using both can create a strong mix of long-term pension savings with shorter-term accessibility. The pension offers upfront tax relief, while the ISA provides tax-free withdrawals.

Final thoughts

The annual allowance for pension tax relief is designed to balance generous tax incentives with fair contribution limits. For most savers, the £60,000 cap provides plenty of room to grow retirement funds efficiently, especially when combined with employer contributions.

Higher earners and those who have begun drawing from their pension need to be aware of the tapered and money purchase allowances to avoid unexpected tax charges.

By understanding how the allowance works and making use of carry forward, you can ensure every contribution is as tax-efficient as possible — helping you build a stronger, smarter retirement fund without paying more tax than necessary.