Pension Annual Allowance and Tax Charges

Introduction

The pension annual allowance sets a limit on how much can be saved into your pensions each tax year before you face a tax charge. For 2025/26, the standard annual allowance is £60,000, but high earners may face a reduced allowance through 'tapering', and if you exceed your limit without unused allowances to carry forward, you'll need to pay tax on the excess.

What is the annual allowance?

The annual allowance is the maximum amount of pension savings that can be made to all your pension schemes in a tax year before you have to pay tax. The limit applies to both:

• Defined contribution arrangements – where your pension savings equal the total contributions made by you, your employer, or any third party
• Defined benefit arrangements – where your pension savings equal the increase in the value of your promised benefits over the tax year

The current annual allowance is £60,000. This limit applies to savings made to UK registered pension schemes, or overseas schemes where you or your employer qualify for UK tax relief.

Tapered annual allowance for high earners

If you're a high earner, your annual allowance may be reduced. This happens when:

• Your adjusted income is over £260,000, and
• Your threshold income is over £200,000

When both these conditions are met, you'll need to work out your tapered (reduced) annual allowance. The threshold income and adjusted income limits were different in earlier tax years.

Carrying forward unused allowances

You can carry forward unused annual allowances from the previous 3 tax years. This means if you didn't use your full allowance in those years, you can add the unused amounts to your current year's allowance before facing a tax charge.

You don't need to report carry forward to HMRC. However, you must use unused allowances in order – earliest year first. If you only need part of an unused allowance from a particular year, you can save the rest for a future year.

When you cannot carry forward

You cannot carry forward unused allowances from any tax year where you were not a member of at least one UK registered pension scheme or qualifying overseas pension scheme.

If you have unused money purchase annual allowance, you cannot carry this forward (though you can carry forward unused alternative annual allowance).

Checking your unused allowances

You can use HMRC's online calculator to check if your pension savings exceed your annual allowance and whether you have unused allowance to carry forward. You'll need to work out your position manually if you have a hybrid pension scheme (combining defined benefit and defined contribution features) or if your provider accepted a flexible drawdown declaration before 6 April 2015.

To work out unused allowances yourself, ask each pension provider for details of your pension savings for each scheme. You have unused annual allowance if your pension savings were less than your annual allowance for that tax year.

Historical allowances for 2015/16

The annual allowance rules for the 2015 to 2016 tax year were unusual:

• 6 April 2015 to 8 July 2015 (pre-alignment tax year): the annual allowance was £80,000 (or £60,000 alternative annual allowance plus £20,000 money purchase annual allowance if those rules applied)
• 9 July 2015 to 5 April 2016 (post-alignment tax year): the annual allowance was zero, but you could carry forward up to £40,000 of unused allowance from the pre-alignment period

The annual allowance tax charge

If your pension savings exceed your annual allowance for the tax year and you don't have enough unused allowances from the previous 3 years to cover the difference, you must pay a tax charge on the excess.

You need to work out how much you've exceeded the allowance and calculate the tax charge yourself. You must then report this to HMRC using a Self Assessment tax return by the deadline, even if your pension scheme pays the charge on your behalf.

Scheme Pays: getting your pension scheme to pay the charge

If your annual allowance tax charge is more than £2,000, you can instruct your pension scheme to pay some or all of the charge if:

• Your pension savings with that scheme exceed the annual allowance for that tax year
• Your tax charge is more than £2,000 for that tax year
• You tell them by 31 July of the year after the following tax year

This is called "mandatory scheme pays" – your scheme must pay the charge if you meet these criteria and ask them to.

If your tax charge is £2,000 or less, your pension scheme can choose to pay all or some of it, but they don't have to (known as "voluntary scheme pays").

How to request Scheme Pays

You must tell your pension scheme electronically or in writing, including:

• Your title, full name, address, and National Insurance number
• The tax year the charge relates to
• The amount of tax charge you want the scheme to pay
• Confirmation that you've calculated the charge correctly
• Confirmation that you understand the request cannot be cancelled
• Confirmation that you understand your benefits will be adjusted
• Your signature and date (or confirmation you personally submitted the request)

Once you've asked your pension scheme to pay the charge, you cannot change your mind. If the tax charge amount changes, you can ask them to adjust what they're paying.

Important consequences of Scheme Pays

If your pension scheme pays the tax charge for you, they must reduce your pension benefits accordingly. You need to check they've made this reduction – if they don't reduce your benefits, you'll have to pay an unauthorised payment charge.

Even if your scheme pays the charge, you must still tell HMRC about it on your Self Assessment tax return. If your scheme only pays part of the charge, you must pay the rest directly to HMRC.

If your pension scheme agreed to pay but failed to do so, you're liable for the charge plus any penalties and interest if you've missed the deadline. You should check that your scheme has paid on time, as you may have to pay interest for late payments.

Reporting on your Self Assessment

When completing your Self Assessment tax return, you must:

• Complete box 10 if you have a tax charge, even if your scheme pays some or all of it
• Enter the amount your scheme pays in box 11 on form SA101
• Include your pension scheme's Pension Scheme Tax Reference (PSTR) in box 12 on the SA101
• If more than one scheme is paying your tax charge, provide details in the 'any other information' box on page TR7 of the SA100

Use the HS345 pension savings helpsheet to help you complete your return correctly.

Sources

• Check if you have unused annual allowances on your pension savings
• Who must pay the pensions annual allowance tax charge
• Tax on your private pension
• Rates and allowances: pension schemes
• Pensions: tax charges on excess over allowances (HS345)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.