How does the pension annual allowance work?

Full answer

The Annual Allowance (AA) is the total pension input amount — your contributions plus your employer's contributions (and, for DB schemes, the increase in the capital value of benefits × 16) — that can benefit from tax relief per tax year. **Standard figures for 2026/27:** - Annual Allowance: **£60,000** (restored from the Lifetime Allowance abolition era; was £40,000 before April 2023). - Maximum effective contribution: the lower of £60,000 or 100% of relevant UK earnings. - Personal contributions above the AA trigger an annual allowance charge (at your marginal rate). **Money Purchase Annual Allowance (MPAA): £10,000** Once you have flexibly accessed a defined contribution pension (taken an UFPLS, entered flexible drawdown, or withdrawn via pension freedoms), your future DC pension contributions are limited to £10,000 per year. This prevents "recycling" of pension income back into a pension for additional tax relief. The MPAA does not affect DB pension accrual. **Tapered Annual Allowance:** For high earners, the AA is reduced: - "Threshold income" > £200,000 AND "adjusted income" > £260,000 triggers tapering. - For every £2 of adjusted income above £260,000, the AA falls by £1. - Minimum tapered AA: £10,000 (reached at £360,000 adjusted income). **Carry forward:** You can use unused Annual Allowance from the 3 previous tax years (in order, oldest first), provided you were a member of a registered pension scheme in those years. In 2026/27 you could potentially carry forward from 2023/24, 2024/25 and 2025/26. **Auto-enrolment:** Employer contributions under auto-enrolment count toward the AA — but at 3% minimum employer + 5% minimum employee = 8% total on qualifying earnings, most workers are well within the £60,000 cap.

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