Quick answer
The annual allowance
The annual allowance is the maximum total pension input, from all sources, that can be made in a tax year while still qualifying for tax relief. The standard annual allowance is currently £60,000 per tax year (2024/25).
For most people, the annual allowance is not a concern, the combination of employee and employer contributions under auto-enrolment is well below £60,000 for the majority of workers. However, it becomes relevant for higher earners, those making large additional contributions or those approaching retirement who want to make significant top-up payments.
What counts towards the annual allowance
All contributions to your pension count towards the annual allowance, your own contributions, your employer's contributions and the tax relief added by the government. For defined contribution pensions, this is straightforward: add up all the contributions paid in during the tax year.
For defined benefit pensions, the calculation is more complex. The annual allowance is assessed using the pension input amount, broadly, the increase in the value of your pension benefit over the year, multiplied by a factor of 16. This can result in a significant pension input amount even if no cash contributions have been made.
The annual allowance charge
If total pension inputs in a tax year exceed the annual allowance, the excess is subject to an annual allowance charge. This charge is added to your income tax bill and is calculated at your marginal rate of income tax, effectively clawing back the tax relief on the excess contributions.
In some cases, it is possible to ask your pension scheme to pay the charge on your behalf in exchange for a reduction in your pension benefits. This is called scheme pays. It is available where the charge is at least £2,000 and your pension input to that scheme exceeds the annual allowance.
Carry forward
Carry forward allows you to use unused annual allowance from the previous three tax years, provided you were a member of a registered pension scheme in those years. This can allow you to make a larger contribution in a single year, for example, if you receive a bonus or come into a lump sum, without triggering an annual allowance charge.
To use carry forward, you must first use your full annual allowance for the current tax year. You then use unused allowance from the earliest available year first. The calculation can be complex, particularly if you have defined benefit pensions, so it is worth taking advice before making large contributions.
Steve's observation
Carry forward is a genuinely useful planning tool that many people don't know about. I regularly work with clients who have received a significant bonus or inheritance and want to make a large pension contribution, carry forward can allow them to do this without triggering an annual allowance charge.
The key is to plan ahead. You need to know your unused allowance from the previous three years, and you need to ensure you have sufficient UK earnings in the current year to support the contribution. This is an area where taking advice can make a real difference.
The tapered annual allowance
High earners may be subject to the tapered annual allowance, which reduces the standard £60,000 allowance for those with adjusted income above £260,000. For every £2 of adjusted income above £260,000, the annual allowance is reduced by £1, down to a minimum of £10,000.
Adjusted income includes your salary, bonuses, employer pension contributions and other income. If you are a high earner, it is important to understand whether the tapered annual allowance applies to you before making large pension contributions.
The money purchase annual allowance
If you have flexibly accessed your defined contribution pension, for example, by taking income from drawdown or taking an uncrystallised funds pension lump sum, your annual allowance for money purchase contributions is reduced to £10,000. This is called the money purchase annual allowance (MPAA).
The MPAA is designed to prevent people from recycling pension income back into a pension to gain additional tax relief. If you are still working and contributing to a workplace pension, triggering the MPAA could significantly limit your ability to continue building your pension pot.
What happened to the lifetime allowance?
The lifetime allowance, which previously limited the total amount you could save in a pension over your lifetime to £1,073,100, was abolished in April 2024. This was a significant change that removed a major constraint on pension saving for higher earners and those with large pension pots.
In its place, two new allowances were introduced: the lump sum allowance (£268,275), which limits the total tax-free cash you can take from your pensions over your lifetime, and the lump sum and death benefit allowance (£1,073,100), which limits the total tax-free lump sums that can be paid on death.
Pause for thought
- Are your total pension contributions, including your employer's, likely to approach the £60,000 annual allowance?
- Do you have unused annual allowance from previous years that you could carry forward?
- If you are a high earner, have you checked whether the tapered annual allowance applies to you?
- Have you flexibly accessed any pension benefits? If so, are you aware of the money purchase annual allowance?
Coaching point
Key terms
Frequently asked questions
What to do next
If you are planning to make large pension contributions, check whether you are likely to exceed the annual allowance and whether carry forward could help. If you are a high earner, check whether the tapered annual allowance applies to you.
Guide 8 moves into the Investments & Charges section, explaining how workplace pension investments work and what happens to your money once it is in the pot.