Pension Tapering UK 2025/26: £260k Threshold Explained

What the tapered annual allowance is

The annual allowance (AA) is the cap on total pension input — your own contributions plus employer contributions plus any salary sacrifice — that can be made tax-efficiently in a single tax year. For 2025/26 the standard AA is £60,000, raised from £40,000 in April 2023.

For high earners, the AA is reduced ("tapered") on a sliding scale once two income tests are both satisfied. The mechanism is in section 228ZA of the Finance Act 2004, with thresholds set by the Finance (No. 2) Act 2023.

The two-gate test

Tapering only bites if both of these are true:

1. Threshold income > £200,000.
2. Adjusted income > £260,000.

If your threshold income is £200,000 or below, your allowance stays at £60,000 no matter how high your adjusted income is. This is why salary sacrifice is so powerful — it reduces threshold income.

Threshold income

Threshold income is, broadly:

• Total taxable income (employment, self-employment, rental, savings, dividends, taxable gains), minus
• Personal pension contributions made by relief-at-source (i.e. net pay) — but not employer or salary-sacrifice contributions.

Adjusted income

Adjusted income is, broadly:

• Total taxable income, plus
• All employer pension contributions (including salary-sacrifice contributions, which HMRC treats as employer contributions).

The deliberate asymmetry means salary sacrifice cuts threshold income but raises adjusted income — so it can rescue you from the first gate while pushing you further over the second.

How the reduction is calculated

Once both gates are passed, for every £2 of adjusted income above £260,000 you lose £1 of annual allowance.

Below £260,000 the allowance is £60,000. From £360,000 upwards the allowance is fixed at £10,000.

Worked example — Sanjay, £230,000 salary + £40,000 employer pension

Sanjay earns a base salary of £230,000 and his employer contributes £40,000 to his SIPP under a non-sacrifice arrangement. He pays no personal contributions outside of this.

• Threshold income: £230,000 (above £200,000 ✓)
• Adjusted income: £230,000 + £40,000 = £270,000 (above £260,000 ✓)
• Reduction: (£270,000 − £260,000) ÷ 2 = £5,000
• Tapered AA: £60,000 − £5,000 = £55,000

His total pension input is £40,000, so he is within his £55,000 allowance with £15,000 spare. He can carry that forward — or add a £15,000 personal contribution to use it up this year.

Worked example — Priya, £180,000 + £80,000 bonus + 10% salary sacrifice

Priya earns £180,000 base, receives an £80,000 March bonus, and salary sacrifices 10% of the combined £260,000 into her workplace pension — £26,000.

• Salary after sacrifice: £260,000 − £26,000 = £234,000
• Threshold income: £234,000 (above £200,000 ✓)
• Adjusted income: £234,000 + £26,000 = £260,000 (not above £260,000 ✗)
• Tapering does not apply. Full £60,000 allowance.

Now repeat with 15% sacrifice (£39,000):

• Salary: £221,000
• Threshold: £221,000 ✓
• Adjusted: £221,000 + £39,000 = £260,000 — exactly on the line, still no taper.

Push to 20% sacrifice (£52,000):

• Salary: £208,000 ✓
• Adjusted: £208,000 + £52,000 = £260,000 — still no taper, and total pension input is £52,000, comfortably below £60,000.

This is why salary sacrifice is the lever of choice for executive earners. It can keep you out of the taper entirely.

What happens if you exceed your tapered allowance

Any contribution above the tapered AA (and unused carry forward) is hit with an annual allowance charge at your marginal income tax rate. For an additional-rate payer that is 45% — effectively undoing all the pension relief on the excess.

You declare the charge on Self Assessment (box 10, page Ai 4 of SA101). For very large excess, "Scheme Pays" lets the pension scheme settle the charge from your pot, but it permanently reduces your fund.

See our detailed pension annual allowance charge guide for the mechanics.

Carry forward — your safety net

Even tapered, you can use carry forward of unused annual allowance from the previous three tax years. The carry-forward amount in each year is what was unused in that year, using each year's tapered allowance (so if you were tapered in 2024/25, you only carry forward what was unused under the tapered 2024/25 allowance).

Carry forward requirements:

1. Member of a registered pension scheme in each of the three prior years (not necessarily contributing).
2. Use current-year allowance first, then the oldest carry-forward year first.
3. Cannot get tax relief on personal contributions above 100% of your relevant UK earnings in the current year.

For high earners this often unlocks £100,000+ of additional capacity in a bonus year. See carry forward 2025/26.

Common errors high earners make

1. Forgetting RSUs and vested shares. Long Term Incentive Plan vests count toward taxable income, often pushing adjusted income tens of thousands higher than expected.
2. Ignoring rental income. UK property profits are added to threshold and adjusted income.
3. Mis-stating employer contributions. Defined-benefit accrual is measured as 16 × (pension increase in the year) + lump sum increase. A modest DB pension rise can be a £40,000+ "input."
4. Failing to make the salary-sacrifice election in time. Sacrifice must be a contractual variation before the salary is earned, not after.
5. Assuming the £200,000 threshold-income gate is generous. Bonus + dividend earners blow past it without noticing.

Spring Budget 2026 — what changed

The £200,000/£260,000 thresholds and £10,000 floor were unchanged in the Spring Budget 2026 pensions and ISAs announcements. The Chancellor explicitly ruled out reducing the AA, but consultation on simplifying the threshold-income definition is open until summer 2026.

Action checklist for 2025/26

1. Forecast adjusted income at start of tax year, including expected bonus, dividend and rental income.
2. Run the two-gate test. If threshold income may exceed £200,000, plan immediately.
3. Front-load salary sacrifice to reduce both threshold income and final taxable pay.
4. Audit prior three years for unused allowance (carry forward).
5. Track DB accrual with the pension administrator's annual statement.
6. If exceeded, file annual allowance charge on Self Assessment by 31 January 2027.

Try the calculator

Run your own scenario:

Sources

• HMRC: Pension Tax Manual PTM057100 — Tapered Annual Allowance
• HMRC: Tax on your private pension contributions
• Finance Act 2004 s.228ZA, as amended by Finance (No. 2) Act 2023
• HMRC: Self Assessment Additional Information notes SA101