The Annual Allowance basics
The Annual Allowance is the maximum you can contribute to pensions in a UK tax year and still get tax relief. For it is £60,000 (unchanged since April 2023 when it was raised from £40,000).
The allowance covers ALL pension contributions in the tax year:
* Your personal contributions (added to SIPP, workplace pension) * Employer contributions * Any salary sacrifice into pension * Defined benefit accruals (calculated as 16 times the annual pension increase)
If total contributions exceed £60,000, the excess is added to your taxable income and taxed at your marginal rate (effectively clawing back the relief on the excess).
The Annual Allowance applies separately to each tax year (6 April to 5 April).
Tax relief on contributions:
* Basic rate (20 percent): added automatically by the pension provider * Higher rate (40 percent): claim extra 20 percent via self-assessment or coding * Additional rate (45 percent): claim extra 25 percent via self-assessment
Salary sacrifice avoids the need to claim: the employer simply contributes pre-tax salary directly to your pension.
How carry forward works
You can use unused Annual Allowance from the previous three tax years, as long as you were a member of a UK registered pension scheme during those years.
Mechanics:
1. Use the current year's full £60,000 allowance first. 2. Then use unused allowance from 3 years ago (oldest first). 3. Then 2 years ago. 4. Then 1 year ago.
The 3-year window is rolling, so each year the oldest unused year drops off.
Worked example, :
* 2023/24 allowance: £60,000, used £20,000 (unused £40,000) * 2024/25 allowance: £60,000, used £15,000 (unused £45,000) * 2025/26 allowance: £60,000, used £25,000 (unused £35,000) * 2026/27 current: £60,000 * Total available in 2026/27: £60,000 + £35,000 + £45,000 + £40,000 = £180,000
You can contribute up to £180,000 in 2026/27 and claim full tax relief, provided your earned income is at least £180,000 (you cannot get relief on contributions exceeding your earnings).
Membership requirement: you must have been a member of any UK pension during the year you want to carry forward from. Even a £0 contribution to a workplace pension counts as membership.
| Tax year | Allowance | Used (example) | Unused carry forward |
|---|---|---|---|
| 2023/24 | £60,000 | £20,000 | £40,000 |
| 2024/25 | £60,000 | £15,000 | £45,000 |
| 2025/26 | £60,000 | £25,000 | £35,000 |
| 2026/27 (current) | £60,000 | Up to £180,000 available | - |
| Adjusted income | Annual allowance |
|---|---|
| Up to £260,000 | £60,000 (full) |
| £280,000 | £50,000 |
| £300,000 | £40,000 |
| £320,000 | £30,000 |
| £340,000 | £20,000 |
| £360,000+ | £10,000 (floor) |
Tapered Annual Allowance for high earners
If your adjusted income exceeds £260,000 in 2026/27, your Annual Allowance is reduced by £1 for every £2 of income over £260,000, down to a floor of £10,000 at adjusted income £360,000.
What counts as "adjusted income":
* Taxable income (salary, bonus, dividends, rental income) * Plus pension contributions (yes - employer contributions are added back for the test) * Less reliefs / charges that reduce taxable income
2026/27 tapered allowance examples:
* Adjusted income £250,000: full £60,000 allowance * Adjusted income £280,000: £50,000 (£10,000 taper) * Adjusted income £320,000: £30,000 * Adjusted income £360,000+: £10,000 floor
Threshold income test: the taper only applies if your "threshold income" (taxable income excluding pension contributions you made) also exceeds £200,000. So a high earner whose salary is mostly sacrificed into pension can avoid the taper.
Carry forward of tapered amounts: you can still carry forward unused tapered allowance, but the maximum you can contribute in any year is the SUM of that year's available allowance (which may be tapered). Carry forward does not let you exceed earnings.
Common use cases for carry forward
1. Bonus year: an investment banker, consultant partner, or sales professional receives a £200,000 bonus. Without carry forward they can only contribute £60,000 with tax relief. With carry forward of 3 prior years, they can contribute up to £180,000 in pension, claiming 40-45 percent tax relief on the full amount (depending on bracket).
2. Business sale: small business owner sells their company. Sale proceeds bump them into the additional rate band. Putting £150,000+ into pension provides 45 percent relief plus shields gains from future inheritance tax (pension is currently outside the estate for IHT, although 2026/27 budget proposed changes - check current rules).
3. Equity vesting: tech worker has a large RSU vest. Salary sacrifice the bonus into pension uses carry forward to capture the full tax relief on a one-off income event.
4. Maternity/sabbatical return: someone returning from a low-income period (parental leave, sabbatical, education) may have 2-3 years of unused allowance. When they return to high income, they can catch up by contributing the unused allowance.
5. Self-employed surge: contractor or consultant with a high-revenue year uses carry forward to even out pension contributions vs prior thinner years.
Limitations:
* You cannot exceed your annual taxable earnings (a pre-existing rule). A £100,000 earner cannot put £180,000 into pension. * You must have been a pension member in the carry-forward year (even a tiny workplace contribution counts). * The MPAA blocks carry forward if you have flexibly accessed any pension.
What MPAA does and how to avoid it
The Money Purchase Annual Allowance (MPAA) is a £10,000 reduced annual allowance that kicks in once you flexibly access ANY pension. Once triggered, you can never carry forward to defined contribution pensions again (defined benefit pensions still get the full Annual Allowance).
What triggers MPAA:
* Taking taxable income from a flexi-access drawdown * Taking an Uncrystallised Funds Pension Lump Sum (UFPLS) * Taking ANY income from a flexible drawdown plan (pre-2015) * Exceeding the cap on a capped drawdown plan
What does NOT trigger MPAA:
* Taking the 25 percent tax-free lump sum without taking taxable income * Buying a lifetime annuity * Receiving a defined benefit (final salary) pension * Small pots commutation (under £10,000) * Setting up a drawdown plan but not yet taking income
Practical advice: if you might want to contribute to pension after age 55 (the minimum pension access age), do NOT take flexible income before you finish contributing. Take the 25 percent tax-free lump sum separately if needed (does not trigger MPAA), or use other savings until your contribution phase is complete.
MPAA + carry forward: once MPAA is triggered, you cannot use carry forward to lift your DC contribution above £10,000. Period. This is a permanent change. Plan carefully.
Run the math for your situation
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