Glossary · UK
What is Annual Allowance Charge?
An income tax charge on pension contributions exceeding the Annual Allowance (£60,000 in 2026/27), levied at the member's marginal rate.
Full Definition
The Annual Allowance (AA) Charge is an income tax charge that arises when total pension savings -- including employee contributions, employer contributions, and any third-party contributions -- exceed the Annual Allowance in a tax year. For 2026/27, the standard AA is £60,000. A lower Money Purchase Annual Allowance (MPAA) of £10,000 applies once flexible drawdown has been triggered, and a tapered AA applies to high earners (adjusted income above £260,000). The charge is calculated at the individual's marginal income tax rate on the excess (20%, 40%, or 45%), effectively withdrawing the tax relief that would otherwise have been given. The charge must be reported on a Self Assessment tax return. It can be reduced or eliminated by carrying forward unused allowance from the previous three tax years (oldest year first). If the charge exceeds £2,000 and the pension input to the scheme exceeds £60,000, the member can use Scheme Pays to have the scheme settle the charge on their behalf, in exchange for a reduced pension.