The Pension Annual Allowance is the maximum amount an individual can contribute to their pension each tax year while still receiving tax relief. For the 2025-26 tax year, the standard annual allowance is £60,000. This figure includes all contributions made by the individual, their employer, and any third parties.
If an individual’s UK taxable earnings are less than £60,000, tax relief is available on contributions up to 100% of the individual’s UK taxable earnings, or £3,600 if higher. Contributions exceeding the annual allowance may be subject to an annual allowance tax charge, which is applied at the individual’s marginal rate of income tax.
For individuals with higher earnings, the annual allowance may be reduced through a mechanism known as the Tapered Annual Allowance. This tapering applies when both the individual’s threshold income exceeds £200,000 and their adjusted income exceeds £260,000 (2025-26). If both thresholds are breached, the annual allowance is reduced by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000 for those earning £360,000 or more.
In addition to the standard and tapered allowances, individuals who have flexibly accessed their pension benefits may be subject to the Money Purchase Annual Allowance (MPAA). This applies to defined contribution pensions and is triggered when an individual begins drawing income from their pension using flexible options such as flexi-access drawdown or uncrystallised funds pension lump sums. Once triggered, the MPAA limits future pension contributions to £10,000 per year, and this reduced allowance cannot be carried forward.
The Lifetime Allowance (LTA), which previously capped the total amount of pension savings an individual could accumulate without incurring additional tax charges, was abolished on 6 April 2024.
Unused Annual Allowances
Unused annual allowances can be carried forward from previous three tax years, allowing individuals to contribute more than the standard annual allowance in a given year without incurring a tax charge. This mechanism is particularly useful for those who have fluctuating income or pension contributions, or who wish to make a large one-off contribution to their pension.
To use the carry forward facility, an individual must first fully use their annual allowance for the current tax year. Only then can they access unused allowances from the three preceding tax years. It’s important to note that the amount of unused allowance available for carry forward is based on the difference between the annual allowance for that year and the total contributions made in that year. If the individual was subject to a tapered annual allowance or the Money Purchase Annual Allowance in any of those years, the carry forward amount would be based on the reduced allowance applicable to them.
Individuals must keep accurate records and ensure they do not exceed the total available allowance across all relevant years. HMRC may request evidence of contributions and allowances used, so it’s advisable to consult with a financial adviser or pension provider when planning to use this facility, especially if contributions are close to the limits.
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
