The Tapered Annual Allowance affects many higher earners who save into pensions. It can significantly reduce how much you contribute while still receiving tax relief.
What is the Annual Allowance?
The Annual Allowance sets out the maximum amount that can be saved into pensions each tax year without triggering an additional tax charge. For the 2025/26 tax year, the standard allowance is £60,000.
This total includes:
- Personal pension contributions
- Employer pension contributions
- Pension growth within defined benefit schemes
The allowance applies across all pension schemes combined. But, it does not apply separately to each pension. As a result, anyone with more than one pension should review their total pension savings each year.
What is the Tapered Annual Allowance?
The Tapered Annual Allowance reduces the standard £60,000 allowance for individuals with higher incomes. If you earn more than £200,000 in a tax year, tapering may apply.
When tapering applies, your Annual Allowance reduces gradually. It can fall to any amount between £10,000 and £60,000. The exact figure depends on your income level for that tax year.
Because income can change over time, your Tapered Annual Allowance can also change from year to year.
When Does Tapering Apply?
You will usually face a Tapered Annual Allowance when both of the following apply in the same tax year:
- Threshold income exceeds £200,000
- Adjusted income exceeds £260,000
When both limits apply, your Annual Allowance reduces by £1 for every £2 of adjusted income above £260,000. Once adjusted income exceeds £360,000, the allowance reaches its minimum level of £10,000.
If threshold income remains at £260,000 or less, tapering will not apply. This rule applies even when adjusted income exceeds £260,000.
Threshold Income Explained
Threshold income focuses on your personal taxable income. It aims to measure income before employer pension funding.
It usually includes:
- Salary, bonuses and commission
- Profits from self-employment or partnerships
- Rental income after allowable expenses
- Dividends from shares
- Interest from savings
From this total, you deduct personal pension contributions and certain specific tax reliefs. However, employer pension contributions do not count towards threshold income.
If threshold income stays at £200,000 or less, your annual allowance will not reduce. This rule protects some individuals with significant employer pension contributions.
Adjusted Income Explained
Adjusted income builds on threshold income. It reflects the full value of income and pension benefits received during the tax year.
It includes:
- All taxable income
- Employer pension contributions
- Pension growth in defined benefit schemes
- Pension contributions made through salary sacrifice
Adjusted income often catches people by surprise. Employer pension funding can push income over the tapering limits. This situation commonly affects senior employees and company directors.
Exceeding the Allowance
If pension savings exceed your available allowance, the excess amount becomes subject to an Annual Allowance Tax Charge. This charge therefore removes the tax relief on contributions above the limit.
You calculate the charge by adding the excess amount to your taxable income. Then, you pay Income Tax at your highest Marginal Rate.
You usually report this charge through a Self Assessment tax return. In some cases, you can ask your pension scheme to pay the charge directly. This option is known as “Scheme Pays”. It reduces your future pension benefits instead of affecting your immediate cash flow.
Using Pension Carry Forward
The Pension Carry Forward rule can reduce or even eliminate an Annual Allowance Tax Charge. It allows you to use unused allowances from the previous three tax years.
To use Carry Forward:
- You must have been a member of a registered pension scheme in those years
- You must confirm whether tapering applied in each earlier year
If you triggered the Money Purchase Annual Allowance, you cannot use Carry Forward. This restriction often affects those who have already accessed pension benefits.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.