Pension Annual Allowance Explained
The maximum you can contribute to pensions tax-efficiently in one year. For 2025-26, the standard annual allowance is £60,000, or 100% of your earnings if lower.
What is the pension annual allowance?
The annual allowance is the maximum amount of pension contributions (from you, your employer and any third party combined) that qualify for tax relief in a single tax year. For 2025-26, this is £60,000. If you contribute more than this, you face an Annual Allowance Charge on the excess, taxed at your marginal Income Tax rate.
How it works
All pension contributions in the tax year are added together: your personal contributions, employer contributions, and any made through salary sacrifice. If the total exceeds £60,000, the excess is added to your taxable income.
You can use carry forward to use any unused annual allowance from the previous 3 tax years, allowing contributions of up to £180,000 in a single year (assuming no contributions in the prior 3 years and sufficient earnings).
High earners may have a tapered annual allowance, reducing the £60,000 limit to as low as £10,000 if their adjusted income exceeds £260,000.
Real example
Greg earns £80,000 and contributes 10% of his salary (£8,000) to his workplace pension. His employer adds 5% (£4,000). Total pension input: £12,000. This is well within the £60,000 allowance, so no charge applies.
If Greg received a large bonus and made additional voluntary contributions totalling £65,000 in the same year, the excess £5,000 would be taxed at his marginal rate (40%), adding £2,000 to his tax bill. He could avoid this by using carry forward from previous years or spreading contributions across two tax years.
Who does this affect?
Most employees never hit the £60,000 cap because average pension contributions are around 8-15% of salary. The allowance primarily affects high earners, company directors making large contributions, and people receiving employer contributions above the norm (such as NHS consultants or senior civil servants with defined benefit pensions).
HMRC source
gov.uk/tax-on-your-private-pension/annual-allowance covers the current allowance, carry forward rules and how to report an excess.
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