How does the tapered pension Annual Allowance work in 2026/27?

Full answer

The tapered Annual Allowance is a targeted restriction on the standard pension contribution allowance, aimed specifically at very high earners, and getting the two-part income test wrong is a common and costly mistake. **The two-part test** Tapering only applies if BOTH of two conditions are met: your "threshold income" (broadly, your total taxable income before pension contributions, with some adjustments) exceeds £200,000, AND your "adjusted income" (broadly, threshold income PLUS your own and your employer's pension contributions for the year) exceeds £260,000. If your threshold income is £200,000 or below, tapering does not apply at all, even if your adjusted income (after adding back large employer pension contributions) would otherwise exceed £260,000 -- this threshold income test is specifically designed to exclude people whose income only looks high once employer pension contributions are added back in. **How the taper works once triggered** For every £2 that adjusted income exceeds £260,000, the standard £60,000 Annual Allowance is reduced by £1, continuing down to a minimum floor of £10,000, reached once adjusted income hits £360,000 (£100,000 of excess income, at a £1-per-£2 taper rate, reduces the £60,000 allowance by the full £50,000 to the £10,000 floor). Adjusted income above £360,000 does not reduce the allowance any further -- it stays at the £10,000 floor. **Worked example: tapering applies** Someone has threshold income of £220,000 (above the £200,000 trigger) and adjusted income of £300,000 (£40,000 above the £260,000 taper start point). Their Annual Allowance is reduced by £1 for every £2 of that £40,000 excess, i.e. £20,000, cutting their allowance from £60,000 to £40,000 for the year. **Worked example: tapering does NOT apply despite high adjusted income** Someone has threshold income of £180,000 (below the £200,000 trigger threshold) but their employer makes a very large pension contribution on their behalf, pushing their adjusted income to £280,000. Because their THRESHOLD income is below £200,000, tapering does not apply at all, and they retain the full £60,000 standard Annual Allowance, despite their adjusted income being well above the £260,000 taper starting point -- illustrating why both tests must be checked separately, not just the higher adjusted income figure. **Why the two-test structure matters in practice** The distinction exists because "threshold income" broadly excludes the value of pension contributions from the calculation (with specific adjustments for salary sacrifice arrangements), while "adjusted income" specifically includes them -- this stops people from using salary sacrifice purely to artificially reduce their threshold income below £200,000 while still receiving very large total pension contributions, since salary sacrificed amounts are specifically added back into the threshold income calculation for this purpose. **Consequences of exceeding your tapered allowance** If your total pension contributions (personal plus employer) exceed your tapered Annual Allowance for the year, and you have no unused allowance to carry forward from previous years, you face an Annual Allowance tax charge, effectively clawing back the tax relief on the excess amount at your marginal Income Tax rate. **Practical tip** High earners close to the £200,000 threshold income or £260,000 adjusted income figures should get a professional pension contribution calculation each year BEFORE finalising bonus sacrifice or additional pension payments, since the interaction between salary, bonus timing, and employer contributions can easily push someone into tapering unexpectedly, particularly in a high-bonus year.

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