Pension Annual Allowance Charge UK 2025/26: When £60k Is Not Enough

Quick answer

The UK pension annual allowance limits how much you can contribute to pensions each tax year while still receiving tax relief. For 2025/26:

Going over the allowance triggers the Annual Allowance Charge — a tax that effectively claws back the relief on the excess contribution.

The allowance applies across all your pensions combined:

• Workplace DC pension contributions (yours + employer's).
• SIPP / personal pension contributions.
• AVCs (additional voluntary contributions).
• Defined Benefit "pension input amount" (calculated, not contribution-based).

How the allowance is "used up"

The mechanism differs by scheme type:

Defined Contribution (workplace, SIPP)

Straightforward: the total contributions during the tax year count:

• Your gross contributions (including HMRC top-up at relief at source).
• Your employer's contributions.

Defined Benefit (final salary, NHS, civil service)

Complex: based on the increase in your pension entitlement during the year, with a multiplier (currently 16) applied:

Annual allowance used = (year-end pension - opening pension uplifted for CPI) × 16 + any lump sum increase

So if your NHS pension grew by £2,000/year (after CPI adjustment), and your tax-free lump sum increased by £6,000, that's:

• (£2,000 × 16) + £6,000 = £38,000 of annual allowance used.

A senior consultant getting a £5,000/year pension increase from a promotion uses £80,000 of allowance in a single year — exceeding the £60,000 limit even without any additional contributions.

This is the "NHS pension crisis" that drove the 2019-23 reforms.

Worked example — over-contribution

Sarah, higher-rate taxpayer, contributes:

• £20,000 to her workplace pension (her + employer).
• £45,000 to her SIPP via additional voluntary contribution.
• Total: £65,000.

Annual allowance: £60,000 (she's under the taper threshold). Excess: £5,000.

Annual Allowance Charge:

• £5,000 × 40% (her marginal rate) = £2,000.

She has two options:

1. Pay the £2,000 herself via Self Assessment.
2. Scheme Pays: ask the SIPP provider to pay the £2,000 from her pension pot directly to HMRC. Her pot reduces by £2,000.

Either way, the effective tax relief on the £5,000 over-contribution is fully clawed back — defeating the purpose.

The tapered annual allowance

For high earners with adjusted income over £260,000, the allowance reduces:

• Allowance loses £1 for every £2 of adjusted income above £260,000.
• Minimum allowance: £10,000 (reached at £360,000+).

Adjusted income = total taxable income + employer pension contributions + employee net pay arrangement contributions.

Worked example — consultant with high BIK

Dr Patel earns £180,000 salary + £40,000 BIK + £15,000 private practice income. Her workplace pension contribution is £25,000 (employer + employee).

Adjusted income: £180,000 + £40,000 + £15,000 + £25,000 = £260,000 — just at the threshold.

Her annual allowance is the full £60,000 (taper hasn't started).

If her income rose to £300,000:

• Adjusted income excess: £40,000.
• Allowance reduction: £40,000 / 2 = £20,000.
• New allowance: £60,000 - £20,000 = £40,000.

Her £25,000 contribution is comfortably within. But if her DB pension scheme had her using £55,000 of allowance, she'd face a £15,000 excess × marginal rate charge.

Carry forward

You can use unused annual allowance from the previous 3 tax years to make a larger contribution in a single year. Conditions:

1. You must have been a member of a UK pension scheme in each of those 3 years (active member, not just having an old pot).
2. You can only use carry-forward after filling the current year's allowance.
3. Used in oldest-year-first order.

Worked example — maxing carry-forward

David has £40,000 of unused allowance from each of 2022/23, 2023/24, 2024/25:

• Current year 2025/26 allowance: £60,000.
• Carry-forward available: £40,000 × 3 = £120,000.
• Maximum total contribution this year: £180,000.

If David has the income to support this (you can only contribute up to 100% of your "relevant earnings" in any single year), he can shovel a massive amount in.

This is the typical mechanism for high-earners selling a business or receiving a large bonus, who want to stuff a pension before tax year end.

Scheme Pays

If you face an Annual Allowance Charge of £2,000 or more (and certain other conditions), you can ask your pension scheme to pay the charge from your pot directly to HMRC.

Benefits:

• No cash outflow from your bank account.
• Charge paid promptly without manual SA negotiation.

Drawbacks:

• Reduces your pension pot.
• May be inflexible — must elect Scheme Pays by 31 July following the tax year.

For DB schemes, Scheme Pays is sometimes the only practical option — DB members often don't have a "pot" to attribute the charge to without scheme cooperation.

The 100%-of-earnings rule

Separate from the annual allowance, you can only get tax relief on contributions up to 100% of your relevant UK earnings (or £3,600 if you have no earnings).

So a £45,000 earner can't contribute £60,000 even with carry-forward — only £45,000 gets tax relief.

This catches non-earning spouses, parental-leave workers, and retirees who would otherwise want to use carry-forward.

Pension input period (PIP)

Since 6 April 2016, pension input periods align with the tax year. Before that, schemes could have different PIP dates — leading to complex transitional rules around 2015/16 specifically.

For 2025/26 contributions you're always working with the 6 April 2025 – 5 April 2026 period.

DB schemes — the calculation pitfall

For DB scheme members (NHS, teachers, civil service, etc.), the allowance calculation can produce surprises:

Common triggers for high pension input

• Promotion — pensionable salary jumps, pension entitlement grows.
• Long service milestone — accrual rate may step up.
• Pay rise above CPI — the inflation-uplifted opening pension is recalculated.
• Late-career service — final salary schemes accrue larger amounts as salary peaks.

The 2023 NHS pension reforms (raising the allowance from £40k to £60k and modifying tapering) reduced but didn't eliminate the issue. Many senior consultants still face Annual Allowance Charges.

Self Assessment reporting

If you owe an Annual Allowance Charge:

1. Calculate the excess and the charge (your marginal rate × excess).
2. Report on Self Assessment for the year — separate section.
3. Pay via the normal Self Assessment payment route OR
4. Elect Scheme Pays by 31 July following the tax year.

For DB members particularly, your pension scheme administrator should provide a Pension Savings Statement showing your pension input for the year — request this from your scheme if you don't get one automatically.

Common mistakes

1. Forgetting to count employer contributions — the £60k includes both yours and theirs.
2. Missing DB pension input — it can be huge without showing as "contributions".
3. Not using carry-forward when you could.
4. Triggering taper at £260k when you could have sacrificed below.
5. Missing the 31 July Scheme Pays deadline.

The Lifetime Allowance — abolished but still relevant

The Lifetime Allowance (LTA) was abolished from 6 April 2024. Replaced by:

• Lump Sum Allowance (LSA): £268,275 — caps tax-free lump sums.
• Lump Sum and Death Benefit Allowance (LSDBA): £1,073,100 — caps tax-free lump sums + tax-free death benefits combined.

For most pension savers, the LSA replaces the LTA as the effective ceiling on tax-favoured pension wealth. See our 25% lump sum post for details.

Try the numbers

Sources

• HMRC: Pension annual allowance
• HMRC: Tapered annual allowance
• HMRC: Scheme Pays
• HMRC: Pension input amounts