How the pensions annual allowance works
In this article
- What is the pensions annual allowance in 2025-26?
- What counts towards the pensions annual allowance?
- What is the tapered pensions annual allowance?
- Can I carry forward my pensions annual allowance?
- What happens if you exceed the annual allowance?
- What about final salary pensions?
- What is the money purchase annual allowance in 2025-26?
- When is the money purchase annual allowance triggered?
What is the pensions annual allowance in 2025-26?
When you save into a pension you benefit from tax relief, which means you don't have to pay income tax on the contributions.
However, the government places a cap on the amount you can save into a pension while still benefiting from tax relief.
This cap is known as the 'annual allowance' and is set at £60,000, or 100% of your income if you earn less than £60,000.
If you have no earnings, you can get tax relief on pension contributions up to £3,600 a year.
The pensions annual allowance has reduced significantly over the years, as the chart below shows.
What counts towards the pensions annual allowance?
Your annual allowance covers all contributions to your pension made by you, your employer or anyone else, and includes tax relief.
The £60,000 limit applies to all private pensions you have, if you have more than one.
What is the tapered pensions annual allowance?
If you earn more than £200,000 and your income including pension contributions (known as 'adjusted income') is more than £260,000, your annual allowance starts to fall.
This is known as the 'tapered annual allowance'. You lose £1 of the annual allowance for every £2 of adjusted income you earn above £260,000.
The table below shows how your annual allowance reduces for incomes above £260,000. Tapering stops when your annual allowance reaches £10,000.
| Total adjustable income | Annual allowance |
| £260,000 | £60,000 |
| £270,000 | £55,000 |
| £280,000 | £50,000 |
| £290,000 | £45,000 |
| £300,000 | £40,000 |
| £310,000 | £35,000 |
| £330,000 | £25,000 |
Can I carry forward my pensions annual allowance?
Yes. You can make use of any unused annual allowance you might have left over from the previous three tax years.
There are two conditions you need to satisfy to be able to do this:
- you must earn at least the amount you wish to contribute in total for the tax year (unless your employer is making the contribution)
- you must have been a member of a UK-registered pension scheme (this does not include the state pension) in each of the tax years from which you wish to carry forward
How 'carry forward' works
Here's how you could use carry forward to make a contribution of £100,000 without exceeding the annual allowance in 2024-25 (as long as you've earnings of at least that amount in the latest tax year).
| 2021-22 | 2022-23 | 2023-24 | 2024-25 | |
| Annual allowance | £40,000 | £40,000 | £60,000 | £60,000 |
| Total pension contribution | £30,000 | £30,000 | £50,000 | £60,000 |
| Annual allowance remaining | £10,000 | £10,000 | £10,000 | £0 |
| Total available - annual allowance plus carry forward | n/a | £50,000 | £80,000 | £90,000 |
What happens if you exceed the annual allowance?
Exceeding the annual allowance will mean that you do not receive pension tax relief on any contributions over this limit and you may have to pay an 'annual allowance charge'.
It is down to you to work out if an annual allowance charge is due. You'll need to fill out a self-assessment tax return to confirm how much of your pension contributions exceed the annual allowance.
If you don't usually complete a tax return, you can contact HMRC directly.
If you have a tax charge of more than £2,000, you have the option for this to be paid from your pension savings. You should talk to your pension provider to find out more about your options.
What about final salary pensions?
Working out how much of your annual allowance you've used if you are in a final salary scheme is more complex than for defined contribution schemes.
Instead of counting the contributions you've made, the annual allowance is applied to the increase in value of your pension during a tax year.
You'll be notified by your scheme administrator if you go over the annual allowance.
What is the money purchase annual allowance in 2025-26?
If you've taken money out of your pension, you can still contribute to a pension and get tax relief.
But you'll get a lower annual allowance - known as the money purchase annual allowance (MPAA). In 2025-26, this is £10,000.
The MPAA applies to people who have taken money from a defined contribution pension.
If you have triggered the money purchase annual allowance, you can't carry forward any unused allowances from previous years.
When is the money purchase annual allowance triggered?
The MPAA is triggered when you:
- take a taxable lump sum from your pension (known as uncrystallised funds pension lump sums)
- take your pension in one go
- start taking an income from your pot using pension drawdown
The MPAA usually won't be triggered if you:
- take a 25% tax-free lump sum
- buy an annuity
- receive an income from a defined benefit pension