A pension is a long-term investment. Its value can go down as well as up and could be worth less than was paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.

 

What is the pension annual allowance?

The annual allowance is the total that you, your employer and any third party can pay in across all your pension plans in any given tax year. Any more than this and you could get a tax charge. Right now, the standard annual allowance is £60,000.

 

Understand your own annual allowance

Your annual allowance depends on two things: The amount of income you earn each year. Plus, whether you take any flexible income from your pension plan. This doesn’t include income from an annuity or your tax-free lump sum.

 

 

Your earnings affect your annual allowance

There may be tax benefits on any payments you put in a pension plan. But the Annual Allowance normally limits how much you can do this to £60,000 each tax year. This includes any basic rate tax benefits that goes into your pension plan. If you don’t have any earnings coming in, the limit is £3,600.

So, let’s say you earn £25,000 a year. The most that you put in is £25,000. Your employer can add to this, but only up to the £60,000 allowance. 

Sometimes you can pay in more than £60,000 each year. For instance, you can carry forward earlier years’ unused annual allowance. You can read more about this below.

 

 

Do you have unused annual allowances from previous years?

If you have not paid in your full allowance in any of the last three tax years you may be able to carry forward your unused allowance. It could let you pay in more in this tax year to make the most of the tax breaks on offer, but this is still subject to your level of earnings.

 

 

How taking money from your pension plan affects your annual allowance

Taking more than just your tax-free lump sum from your pension plan can lower your annual allowance. This is called the Money Purchase Annual Allowance. The allowance will now be £10,000 each tax year. You can’t carry forward this allowance. It applies if you take your pension pot in lump sums or as a flexible income. Buying an annuity or getting defined benefit pension payments or cashing in pension plans worth £10,000 or less won't trigger this.

 

 

What if you're in a defined benefit scheme?

If you’re a member of a defined benefit scheme (also known as a final salary scheme), it’s not how much you pay in that counts. There is a system of rules that decides how much your retirement benefits increase by each tax year. You can get this figure from your pension scheme.

 

The annual allowance for high earners

You’re a high earner if you have an ‘adjusted income’ of £260,000. This includes how much your employer pays into your pension plan, your salary and any other income you get each year. So, pension and rental income, dividends, interest on savings and sales commission are all part of it.

If the total is over £260,000, your annual allowance is likely to be reduced by £1 for every £2 over the limit. This will apply until your allowance gets to £10,000.

 

 

Talk to an expert if the tapered annual allowance affects you

This is a simple, easy to understand description of how the tapered annual allowance works. But it can be very complex in real life. We strongly recommend you talk to a financial adviser to get help with your choices, if you think it may affect you. There is likely to be a cost for this.

Learn some more about financial advice on our dedicated page.

How the annual allowance can affect you:

Adjusted income Annual allowance

Up to £260,000

 £60,000

£270,000

£55,000

£280,000

£50,000

£290,000

£45,000

£300,000

£40,000

£310,000

£35,000

£320,000

£30,000

£330,000

£25,000

£340,000

£20,000

£350,000

£15,000

£360,000

£10,000

 

 

 

What happens if you go over the allowance?

Here are two examples of what can happen if you go over the annual allowance.

Example 1 Example 2

Let’s say you have made an overpayment of £10,000 in the 2024/2025 tax year.

Then say your income is £75,000, which makes you a higher-rate taxpayer.

To calculate the tax charge, the overpayment is added to your income. This means your total income is £85,000.

All of the overpayment is liable to tax at 40%. This gives you a tax bill of £4,000 and is reported through self-assessment.

 

Now let’s say you’ve made an overpayment of £20,000 for the 2024/2025 tax year.

Then say your income is £145,000. To calculate the tax charge, the overpayment is added to your income. This gives you a total income of £165,000.

As the additional tax bracket starts at £150,000, your overpayment would cross two tax bands.

This means £5,000 of the overpayment is liable to tax at 40%, and the other £15,000 at 45%.

So overall, your tax bill would be £8,750 and would be reported through self-assessment.

 

 

Three ways to make the most of your pension and annual allowance

 

 

1. Benefit from tax breaks while you still can

Government tax breaks on your pension contributions at higher income tax rates may not be around forever. Consider making the most of it while you can. 

When paying into your pension plan it’s important to remember that your pension is invested and can go down as well as up. It’s possible that you could get back less than was paid in.

 

 

2. Use up any allowances from previous tax years

Find out if you have any unused allowance by asking your pension provider. If you’re a Standard Life customer, you can go to the secure pension page or app. Get secure online servicing. 

If you do, you may be able to carry it forward to next year. Or, you and your employer could pay more into your pension plan this year.

 

 

3. Rethink your savings

If you have ISAs or other savings, you could think about putting these in your pension plan and benefiting from the tax break. 

Think about doing this while you’re still in work. If you have no earnings, the most you can pay in each tax year is £3,600. 

Before you choose where to save, it’s important to think about what’s right for you. If you need your savings before 55 (rising to 57 in 2028), keeping them in an ISA may be better.

 

 

Need more help?

For more information visit  MoneyHelper , the government backed guidance and support service.

Alternatively, a financial adviser could help you plan for your future. Our financial advice page explains what they do, and why you might want one.

More about pensions

We want to help you get the most out of your pension. We have guides, tools, articles and more to help you understand how pensions work and how to keep your savings on track.

  • Lump Sum Allowances

    These are limits on the total tax-free lump sum benefits that can be paid from all your pensions during your lifetime and on death.

  • Tax in retirement

    Don't pay more tax than you need to in retirement. Find out how to be tax-efficient with your pension money.

  • Passing on your pension

    Pensions are a tax-efficient way to pass on your wealth. here's how to do it in the right way.