When you put money into a pension, the government gives you a bonus called tax relief.
Basically, some of the tax you’d normally pay on your wages goes into your pension instead. That’s a pretty good deal, but there’s a limit to how much you can save each year and still get that bonus. That limit is called the annual allowance, and for most people in the 2026/27 tax year it sits at £60,000.
The allowance resets every year on 6 April, which is the start of the new tax year. Any pension savings you make above the limit won’t get the tax bonus, and you may have to pay a tax charge on top of that. Most people never get anywhere near the limit, but it’s worth understanding how it works so you don’t accidentally fall foul of it.
The £60,000 limit covers everything that goes into your pension, not just what you pay.
The annual allowance includes every penny going into your pension, from you, from your employer, and from the government in the form of tax relief. So if your employer pays in alongside you, all of that counts towards the same £60,000 cap. There’s also a second rule for people with standard workplace pensions: your own contributions can’t be more than your total earnings for the year, even if you’re under £60,000.
If you earn less than £3,600 a year, the rules are slightly different. You can still save up to £3,600 into a pension and get tax relief on it, which works out as £2,880 of your own money with £720 added by the government on top. That protection exists so that people on very low incomes or those who aren’t working at all can still build up pension savings with some government support.
Final salary pensions work differently from standard ones.
If you’re in a final salary or career average pension scheme through work, the annual allowance doesn’t measure how much money goes in. Instead, it measures how much your future pension promise has grown in value over the year. Your pension administrator works this out for you automatically, so you don’t have to calculate it yourself, but it’s worth knowing the distinction exists if you’re in this type of scheme.
You’ll receive a pension savings statement automatically if you go over the annual allowance in a final salary scheme. If you want to check at any point rather than waiting, you can ask your administrator directly for a statement. This is worth doing if you’ve had a big pay rise or a particularly good year, since both can push the growth figure higher than expected.
Some people have a lower limit than £60,000.
Two groups of people face a reduced annual allowance. The first is higher earners — if your income goes above £200,000, something called the tapered annual allowance kicks in, which gradually reduces your limit down to as low as £10,000 depending on how much you earn. The second group is anyone who has already started taking flexible withdrawals from a pension pot. Once you do that, a separate £10,000 limit called the money purchase annual allowance applies to any future pension saving.
The flexible withdrawal rule catches people out more often than the high earner rule, simply because taking even a small flexible payment from a pension can trigger it without people realising. If you’ve dipped into a pension pot at any point, it’s worth checking whether this lower limit now applies to you before making further contributions; otherwise, you could end up with an unexpected tax charge.
You can sometimes use unused allowance from previous years.
If you didn’t use your full annual allowance in the previous three tax years, you may be able to carry that unused amount forward and add it to this year’s limit. This is useful for anyone who wants to make a larger one-off contribution, perhaps after receiving a bonus, an inheritance, or selling a property. It means the effective amount you can save in a single year can be considerably higher than £60,000 if you have unused allowances sitting in previous years.
There are some rules around this. You need to have been a member of a pension scheme in the years you’re carrying forward from, even if you didn’t pay anything in during those years. And if the lower £10,000 money purchase annual allowance applies to you, carry forward isn’t available at all. A financial adviser can help you work out whether you qualify and how much you could potentially carry forward.
Going over the limit means paying tax on the excess.
If you save more than your annual allowance allows, the amount over the limit gets taxed as income. So if you’re a basic rate taxpayer, you’d pay 20% on the excess, and if you’re a higher rate taxpayer, you’d pay 40%. The tax relief you received on the excess effectively gets clawed back through this charge, which is why breaching the allowance tends to cancel out the benefit of saving the extra amount in the first place.
There are two ways to pay the charge. You can pay it yourself through a self assessment tax return, or you can ask your pension provider to pay it on your behalf, which is called scheme pays. If your provider pays it, your future pension benefits are reduced to account for it. Either way, you still need to file a self assessment return to formally report it to HMRC, so keeping on top of your pension statements from all providers is important if you think you might be close to the limit.
Getting advice is worth it if you’re anywhere near the limit.
For most people on average salaries, the annual allowance is something they’ll never need to think about because they’re nowhere near £60,000 in total pension saving each year. But for anyone who is self-employed, has a generous employer contribution, is making up for lost time with large payments, or has taken flexible withdrawals in the past, the rules are worth understanding properly rather than discovering after the fact.
A regulated financial adviser can tell you exactly what your personal allowance is, whether carry forward applies to your situation, and how to structure contributions in the most tax-efficient way. The MoneyHelper service also offers free guidance from pension specialists by phone, webchat, and WhatsApp if you want an initial steer before deciding whether to pay for full advice.
