Pensions remain one of the most tax-efficient ways to save in the UK. You get upfront tax relief on contributions, investment growth is tax-free inside the pension wrapper, and the money can be drawn flexibly in retirement. The key limit is the annual allowance — the maximum you can contribute to pensions in a tax year while still receiving tax relief. For 2025-26, this stands at £60,000.
The Standard Annual Allowance: £60,000
The pension annual allowance is £60,000 for 2025-26. This is the same as in 2024-25. It covers:
- Personal contributions you make to any pension scheme
- Contributions made by your employer on your behalf
- For defined benefit (final salary) schemes, the “pension input amount” calculated based on the increase in your accrued pension value
All contributions across all your pension arrangements are counted together.
Important: you can only get tax relief up to 100% of your UK earnings. If you earned £30,000, you can get tax relief on at most £30,000 of pension contributions even though the annual allowance is £60,000. Non-earners can contribute up to £3,600 per year and still get basic rate tax relief (meaning they pay in £2,880 and the pension is topped up to £3,600).
How Tax Relief Works
When you make a personal contribution into a personal pension, SIPP, or stakeholder pension:
- The pension provider claims basic rate tax relief (20%) on your behalf from HMRC
- You effectively pay in 80p for every £1 that goes into your pension
- Higher and additional rate taxpayers can claim the extra relief through Self Assessment
Example
A higher-rate taxpayer (40%) wants to contribute £10,000 to their pension:
- They pay in £8,000
- The pension provider claims £2,000 from HMRC (basic rate relief)
- The taxpayer claims an additional £2,000 back through Self Assessment (the extra 20% relief)
- Net cost to the taxpayer: £6,000 for £10,000 in their pension
For a 45% additional rate taxpayer, the net cost is even lower: £5,500 for £10,000 in the pension.
Employer contributions get full tax relief and are also free of employer NI — making them extremely efficient.
The Tapered Annual Allowance for High Earners
If you are a high earner, your annual allowance may be reduced below £60,000 by the tapered annual allowance. The taper applies when:
- Your threshold income (broadly, gross income excluding pension contributions) exceeds £200,000, AND
- Your adjusted income (income including employer pension contributions) exceeds £260,000
When both conditions are met, your annual allowance reduces by £1 for every £2 of adjusted income above £260,000.
The minimum tapered annual allowance is £10,000, reached when adjusted income exceeds £360,000.
Taper Example
An individual has an adjusted income of £300,000 (i.e., £40,000 above the £260,000 threshold):
- Reduction: £40,000 ÷ 2 = £20,000
- Tapered annual allowance: £60,000 − £20,000 = £40,000
They can contribute up to £40,000 to their pension while receiving tax relief. Exceeding their tapered allowance results in an annual allowance charge — effectively a tax clawback on the excess.
Carry Forward: Using Unused Allowance from Previous Years
If you haven’t used your full annual allowance in the three previous tax years, you can carry forward the unused amounts to the current year. This allows you to make a much larger contribution in a single year — useful if you receive a bonus, sell a business, or have a lump sum to invest.
Carry Forward Rules
- You must have been a member of a registered pension scheme in each year you want to carry forward from
- You must use the current year’s full annual allowance first before drawing on carry forward
- You can carry forward from the three most recent tax years (2022-23, 2023-24, 2024-25 for 2025-26)
- Your total contribution (including carry forward) is still capped at 100% of your earnings
- The allowance for each historical year was: £60,000 (2024-25), £60,000 (2023-24), £60,000 (2022-23)
Carry Forward Example
In 2025-26, an individual earns £180,000 and wants to make a large pension contribution:
- 2025-26 annual allowance: £60,000
- Unused allowance 2024-25: £20,000
- Unused allowance 2023-24: £35,000
- Unused allowance 2022-23: £40,000
- Maximum contribution: £60,000 + £20,000 + £35,000 + £40,000 = £155,000
Since their earnings are £180,000, the earnings cap is not an issue. They could potentially contribute £155,000 in 2025-26 and receive tax relief on all of it.
Carry forward is calculated by your pension provider or financial adviser. Keep records of your pension contributions in previous years to accurately calculate available carry forward.
The Money Purchase Annual Allowance (MPAA): £10,000
If you have already started to flexibly access your defined contribution pension — for example by taking income drawdown or an uncrystallised funds pension lump sum (UFPLS) — your annual allowance for future money purchase (defined contribution) contributions is drastically reduced to just £10,000.
This is called the Money Purchase Annual Allowance (MPAA), and it applies from the date you first take a flexible payment.
The MPAA exists to prevent “pension recycling” — using pension savings as a tax-free bank, taking money out and contributing it back in to claim tax relief again and again.
Key Points About the MPAA
- It applies to defined contribution (money purchase) pension inputs only
- Taking only tax-free cash from a pension or buying a lifetime annuity does not trigger the MPAA
- Taking a small pots lump sum (from a pot under £10,000) does not trigger it either
- Once triggered, the MPAA cannot be reversed
- Carry forward cannot be used to increase the MPAA — the £10,000 is a hard cap for DC contributions
If you have a defined benefit pension (final salary scheme), you can still accrue benefits up to a separate “alternative annual allowance” — but the rules are complex and professional advice is recommended.
Defined Benefit Pensions and the Annual Allowance
For defined benefit schemes, the pension input amount is not based on contributions but on the increase in the capital value of your promised pension benefit. The calculation is:
Pension input amount = (pension accrued × 16) + (lump sum accrued) − inflation adjustment
The 16× multiplier means that even a relatively modest increase in your annual DB pension can quickly use up a large portion of the annual allowance. Teachers, NHS employees, and civil servants in legacy defined benefit schemes should be particularly aware of this, as career-average revaluation can generate substantial pension input amounts in good earnings years.
What Happens If You Exceed the Annual Allowance?
Contributions above the annual allowance (plus any carry forward) are subject to the annual allowance charge. This charge effectively removes the tax relief you received on the excess contributions. It is calculated at your marginal rate of income tax — 20%, 40%, or 45%.
The charge is declared on your Self Assessment tax return. If the charge is over £2,000, you can ask your pension scheme to pay it from your fund (known as “scheme pays”) rather than paying it directly to HMRC.
Use our pension tax relief calculator to model the tax relief available on your pension contributions for 2025-26, including the impact of carry forward and the tapered allowance.