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The annual allowance

The annual allowance is how much can be saved towards a pension each tax year without a tax charge applying. How pension savings are measured against the annual allowance depends on the type of pension scheme:

• For defined contribution (DC) pensions, it is the total contributions from all sources paid during the tax year.
• For defined benefit (DB) pensions, it is the capitalised value of the increase in the accrued benefits over the tax year.

The standard annual allowance is £60,000 for tax year 2024/25. For tax years 2016/17 to 2022/23 it was £40,000.

It's possible to save more than the standard annual allowance by carrying forward unused allowances from previous years.

Also, there are currently two situations where an individual can have an annual allowance lower than the standard £60,000:

• Individuals with total income and employer contributions over £260,000 may have a reduced AA, potentially as low as £10,000 - different figures applied in earlier years. This is commonly known as the 'tapered annual allowance'.
• Individuals who have accessed their DC funds flexibly will be subject to the money purchase annual allowance (MPAA), currently set at £10,000. This restricts contributions to DC schemes and also prevents the use of carry forward to make a higher DC contribution.

Exceeding the available annual allowance, including any carried forward, will incur the annual allowance tax charge. This is levied on the pension scheme member, regardless of who actually paid the contributions that led to the excessive amount.

Exemptions from the annual allowance

There are exemptions from testing against the annual allowance (and the MPAA) on:

• death
• serious ill-health (life expectancy of under a year)
• severe ill-health (unlikely to ever be able to work again, in any capacity)

Valuing pension savings for the annual allowance

To assess the amount of annual allowance used, pension savings have to be measured. The pension savings are termed the pension input amount and the duration this is measured over is the pension input period.

All pension input periods (PIPs) are now aligned to the tax year. Before 2016/17, PIPs were specific to each individual member of a pension scheme and could have run differently from the tax year.

DC schemes - pension input amount

This is the total of contributions from all sources made within the input period. This includes personal contributions, employer contributions, and third party payments.

These amounts form part of the pension input amount regardless of whether the payers received any tax relief on the contributions.

However, if a pension scheme accepts personal or third party contributions for a member over the age of 75, these are not included in pension input amount (and also don't qualify for tax relief).

DB schemes - pension input amount

The input amount is the capitalised value of the increase in the DB benefits over the input period, using a factor of 16:1.

The input amount is calculated by subtracting the opening value of the benefits from the closing value. These values are calculated as:

• Opening value - The pension benefits at the start of the tax year are capitalised by multiplying the accrued pension by 16.
  
  If the scheme provides a separate lump sum in addition to the pension, the accrued lump sum is added to this value (this is typically seen in older public sector schemes).
  
  This total value is then allowed to be increased by the annual percentage CPI from September of the previous year. If the CPI figure is negative, the total remains the same, it does not decrease.
  
  
• Closing value - This is the increased pension amount at the end of the tax year multiplied by 16.
  
  Add in the increased amount of any separate lump sum.

Subtract the opening value from the closing value and any positive result is the pension input amount for the tax year.

If the result is negative, which can occur when the CPI figure to use for uprating the opening value is quite large and the actual accrual during the year is small, then the pension input amount is just zero, not the negative amount.

Accurate figures for the input amount for a DB scheme would normally need to be obtained from the scheme administrator, but below is an example of how the calculation works.

Recent years' CPI figures:

Deferred members of DB schemes

For tax years 2011/12 onwards, there's no pension input amount for a deferred member of a DB scheme with preserved benefits provided they don't increase by more than CPI or, if greater, in line with the provisions of the scheme rules as at 14 October 2010.

But this only applies where the individual is a deferred member for the whole of a pension input period (or went straight from deferred to pensioner status). In the year they become a deferred member, and there is some active accrual, the pension input amount has to be calculated.

Carry forward of unused allowances

If the annual allowance in a particular tax year isn't fully used, it's not necessarily lost. That unused allowance can be carried forward to a later tax year. This may make it possible to pay more than the current year's allowance without incurring an annual allowance tax charge. So someone who didn't have the available funds or the earnings in earlier years can carry forward the unused amount to a year when their circumstances are different.

You can carry forward unused allowance from up to three tax years, so when looking at a year where contributions will exceed the annual allowance, any unused allowances from the three previous tax years can be brought forward to cover (or reduce) the excess.

The ability to carry forward is subject to the following rules:

• It's only possible to use carry forward after the current year's annual allowance has been fully used up.
• Unused allowance can be brought forward to the current tax year from the previous three tax years - starting with the earliest year first.
• The unused allowance in the carry forward years is based on the annual allowance in the relevant year including any tapered annual allowance which applied in that year
• The person had to have been a member of a registered pension scheme at some point during the carry forward year in question. There's no need for any contributions to have been made to the scheme in that year, so 'membership' includes deferred or paid up members and also pensioner members where the scheme is paying a pension directly to them.
• Those who have triggered the money purchase annual allowance can no longer use carry forward for money purchase (DC) arrangements.
• Excess payments in earlier years - when looking back, if the annual allowance was exceeded in any of the last three tax years then a carry forward exercise would need to have occurred in that particular year to avoid an annual allowance charge. This may have been documented at the time, but to make sure that the correct amount of unused allowance is calculated for the current year, it's necessary to look back three years prior to the year of that overpayment.
  
  The example below illustrates this point.

Carry forward and tax relief

Tax relief on contributions using carry forward is given in the year of payment - the year the unused allowances are being carried forward into. This means:

• employer contributions are subject to the usual wholly and exclusively test based on the period in which they are paid; 
• personal contributions are limited to 100% of the individual's relevant UK earnings in the tax years in which payment is being made. If contributions were solely being paid by the individual, carry forward could not be used unless their earnings in the current year were greater than the annual allowance for that year.

Restrictions to the annual allowance

The tapered annual allowance for high earners

Since the 2016/17 tax year, high earning individuals could have had their annual allowance reduced depending on their total level of income and employer contributions within the tax year.

The standard annual allowance is reduced by £1 for every £2 of adjusted income an individual has over

• £260,000 for tax year 2023/24 onwards
• £240,000 for tax years 2020/21 to 2022/23
• £150,000 for tax years 2016/17 to 2019/20

From tax year 2023/24 onwards - tapering continues until the annual allowance is reduced to £10,000. The £10,000 allowance will apply to those with an adjusted income of £360,000 or more.

Tax years 2020/21 to 2022/23 -  tapering continues until the annual allowance is reduced to £4,000. The £4,000 allowance will apply to those with an adjusted income of £312,000 or more.

Tax years 2016/17 to 2019/20 - tapering stops once the annual allowance is reduced to £10,000. The £10,000 allowance applies if adjusted income was £210,000 or more.

However, there is another income test which can help retain the full allowance for higher earners. Even if  adjusted income is over the threshold, the annual allowance is not cut if their threshold income is:

• £200,000 or less for tax years from 2020/21
• £110,000 or less for the tax years 2016/17 to 2019/20

What's included in each definition of income is as follows:

* An individual's total income chargeable to tax, from all sources could, for example, include:

• earnings from employment and/or self-employment, including benefits in kind
• the taxable element of a redundancy payment
• pension income (State Pension or private pensions)
• dividend income
• rental income
• income from a trust
• interest from savings

For more information on what counts as income for the adjusted income and threshold income limits, see our practical guide 'The tapered annual allowance - adjusted income and threshold income'.

** The value of employer contributions for a money purchase scheme will be easy to identify. For a defined benefit (DB) scheme, it's the total pension input amount, less any contributions paid to the scheme by the individual.

DB higher earners who are caught won't have the same scope to adjust their funding levels to remain below their reduced annual allowance and will have to make a choice:

• remain in the existing scheme and suffer the tax charge or
• leave the DB scheme and perhaps fund up to the reduced AA through a money purchase scheme

This decision may hinge on the value of the employer funding that may be lost if they quit the DB scheme.

Anti-avoidance legislation has been introduced to ignore arrangements designed to shift income earned in one tax year, but taxed in a different year.

As personal contributions are an allowable deduction when calculating threshold income, making a payment can actually help to reinstate the full annual allowance.

• Carrying forward into a year with a tapered annual allowance - Individuals can still bring forward unused allowance as normal to pay an amount greater than their tapered annual allowance or to avoid or reduce tax charges.
• Carrying forward from a year with a tapered annual allowance - The unused annual allowance available to carry forward from a tax year in which the taper applies will be the balance of the tapered amount, even when carrying it forward to a year where the taper doesn't apply.

The money purchase annual allowance (MPAA)

When pensions are flexibly accessed from 6 April 2015 under pension freedoms future contribution limits may be restricted.

The money purchase annual allowance reduces the annual allowance from £60,000 to £10,000 - but only for contributions to money purchase (DC) schemes.

For tax years 2017/18 to 2022/23, the MPAA was £4,000.

Once the MPAA is triggered:

• the individual will still have the standard annual allowance of £60,000 (or possibly a lower allowance if tapering applies) - this would be relevant for those who are also in a defined benefit (DB) scheme;
• but no more than the MPAA can be paid to money purchase schemes; and
• it won't be possible to use carry forward to pay a larger money purchase contribution.

Events that trigger the MPAA

The MPAA will be triggered when the individual, after 5 April 2015, first takes:

• an uncrystallised funds pension lump sum (UFPLS)
• income from a flexi-access drawdown fund (including payments from a short-term annuity provided from a flex-access drawdown fund), but see below about disqualifying pension credits and survivors’ pensions
• a flexible annuity
• income greater than the limit from a fund in capped drawdown
• a ‘stand-alone lump sum’ from a money purchase arrangement - but only if relying on primary protection and where tax-free cash rights have also been registered for primary protection
• a scheme pension from a money purchase arrangement that's providing scheme pensions to less than 12 members (including dependants) at the time the first payment is made or
• notifies their scheme administrator that they want to convert their capped drawdown fund to a flexi-access drawdown fund, then takes income from that fund

Also, a trigger event would have occurred on 6 April 2015 for anyone who went into flexible drawdown prior to that date. Any residual flexible drawdown funds were automatically converted to flexi-access drawdown funds on 6 April 2015. This is the case even if no income has been taken after 5 April 2015.

Events that DON'T trigger the MPAA

The following methods of taking benefits won't trigger the MPAA:

• Tax-free cash only - even if the remaining pot is designated for flexi-access drawdown. It's actually taking a payment of flexi-access income that counts
• Secure income - such as a non-flexible annuity or defined benefit pension
• Capped drawdown - existing capped drawdown users on 5 April 2015 won't trigger the MPAA as long as their drawdown income remains within the income cap. Also, designating new funds for drawdown within a capped drawdown plan which is a single arrangement won't trigger the MPAA - providing, of course, the income remains within the capped drawdown limit
• Small pots - taken as lump sums under the triviality or stranded pots rules
• 'Stand-alone lump sums’ - even if part of it is subject to income tax, unless relying on primary protection and where tax-free cash rights were also registered for primary protection
• Survivors' pensions - pensions for beneficiaries will never trigger the MPAA, regardless of the method of payment
• Disqualifying pension credit - this is a fund that was created by a pension sharing order on divorce that was derived from a pension already in payment. Income paid as flexi-access drawdown from an arrangement made up entirely of a disqualifying pension credit will not trigger the MPAA

Testing against the MPAA

First year:

The MPAA takes effect from the date it was triggered onwards.

So in the tax year in which the MPAA is triggered there are two separate AA tests.

1. Over the entire tax year has more than the standard annual allowance currently £60,000 (or the tapered allowance for high earners) been paid into pensions? and
2. Was more than the MPAA, currently £10,000, contributed from the date the MPAA was triggered until the end of the tax year?

Subsequent years

Where the MPAA applies for the whole of the tax year, then DC contributions are limited to £10,000 overall, and any amount paid in excess of that will be liable for the annual allowance tax charge.

DB accrual is not restricted by the MPAA, though if an individual was an active member of both a DB and DC scheme, the maximum input amounts for both would be £10,000 for DC and £50,000 for DB - however, the DB scheme could receive more using carry forward. Carry forward is not available to cover DC contributions over the MPAA.

Information requirements

When someone first flexibly accesses their pension, the scheme administrator has to provide a statement to the member within 31 days confirming that they've triggered the MPAA.

The member then has to notify any other schemes that they're an active member of (i.e. where contributions are being paid to a money purchase scheme or they're accruing benefits under a cash balance or hybrid scheme) within 91 days of receiving their statement, so that they're also aware that the MPAA will apply.

If someone who has previously flexibly accessed benefits joins a new scheme, they have to tell the scheme administrator within 91 days - unless the new scheme has been established by a transfer. For transfers, it's the duty of the scheme administrator of the transferring scheme to tell the receiving scheme administrator within 31 days of the date of transfer.

The annual allowance tax charge

If an individual has exceeded their available annual allowance within a tax year, and the excess cannot be covered by carrying forward unused allowances from previous years (or they've paid more than the MPAA and cannot use carry forward), then there will be an annual allowance tax charge due on the excess.

To determine what rate (or rates) of charge applies, the excess amount over the available annual allowance is added on top of the individual's total taxable income for the tax year to see which tax band (or bands) it falls into. However, the excess amount doesn't actually increase taxable income.

The income in this case is referred to as the individual's 'reduced net income', which is broadly their total taxable income for the tax year after deducting personal allowances, gross pension contributions, allowable losses, gross charitable donations etc.

The charge for UK taxpayers outside of Scotland is:

• 45% on any of the excess amount that falls into the additional 45% income tax* band
• 40% on any of the excess amount that falls into the higher 40% income tax* band and
• 20% on any of the excess amount that falls into the basic 20% income tax* band

Different tax bands and rates apply for Scottish residents compared to the rest of the UK. When calculating the annual allowance tax charge for Scottish residents, the Scottish income tax bands should be used. In tax year 2024/25:

• 48% on any of the excess amount that falls into the top rate band
• 45% on any of the excess amount that falls into the advanced rate band
• 42% on any of the excess amount that falls into the higher rate band
• 21% on any of the excess amount that falls into the intermediate rate band 
• 20% on any of the excess amount that falls into the basic rate band

* For the purpose of this calculation and the way we have explained it, do not further adjust the various tax bands by the amount of the gross member pension contributions.

The lowest rate of charge is 20% - Scottish taxpayers won't pay any of the charge at the 19% starter rate.

Who can pay the charge

The annual allowance tax charge is normally collected through self-assessment. If someone hasn't been sent a personal tax return but they have a liability to pay the charge, they should notify their tax office. The charge is payable even if the member is not UK resident.

It's sometimes possible for annual allowance tax charges to be paid from pension benefits, a process known as "scheme pays". This could save individuals from having to find the money to pay the tax charge during self-assessment. Pension schemes can choose to offer this facility in any circumstances. But they're only required to pay the charge on behalf of a member if:

• The pension input amount to that specific scheme was more than the full annual allowance of £60,000. For clarity, this does not include those who have only exceeded the £10,000 MPAA or high earners who have only exceeded their tapered annual allowance
• the charge is more than £2,000 and
• the member elects for the charge to be met from their pension benefits under the scheme

The deadline for the election is 31 July in the following calendar year. For example, if the charge is in respect of 2023/24, the deadline is 31st July 2025.

The member can only require that the scheme administrator pays the charge (or part of it) relating to the excess over the full standard annual allowance (£60,000) that their scheme received.

If a scheme meets all the above criteria but the member transfers all their benefits out before requesting the scheme to pay the charge, the original scheme can no longer be made to pay the charge but the scheme that received the transfer can, provided the member makes the request before the deadline that would have applied to the original scheme.

Scheme pays in other circumstances

If the criteria for compelling the scheme to pay the annual allowance tax charge aren't met, for example because less than the full standard allowance was paid in, but the amount still exceeded the tapered annual allowance, it is still possible for the scheme to pay the charge - though they have no obligation to do so.

If the scheme is willing, the deadlines for notification are likely to be much shorter. The liability for the charge remains with the individual and so needs to be paid by the self-assessment deadline of 31 January following the end of the tax year to which the charge relates. For example, if the charge is in respect of 2023/24, the payment deadline is 31 January 2025.

In order for the scheme to be able to deduct the charge and pay across to HMRC by the deadline, they may request notification much sooner, perhaps no more than four to five months after the end of the tax year concerned. Due to this narrow window, it's important to get as much information about what has been paid in and what an individual's income for the year as soon as possible after the tax year ends.

The effect on pension benefits

If a pension scheme pays the charge (or part of it), the member's fund (or level of benefits) must be reduced accordingly. Failure to do this will lead to unauthorised payment tax charges.

• Money purchase schemes - the member's pension pot will simply be reduced by the amount of the charge paid by the scheme
• Defined benefit schemes - the charge will be recouped by actuarially reducing the member's accrued pension rights. GMP benefits can't be reduced to pay the charge. This can sometimes mean that the scheme is unable to pay it

If getting a scheme to pay the charge is an option, the member should, of course, contact the scheme provider or trustees to find out what impact this would have on their benefits.

Self-assessment return

The amount of the excess above the available annual allowance needs to be recorded on SA101, the additional information sheet of the self-assessment tax return for the tax year concerned. Any amount of the charge being paid by a pension scheme is also required.

If there are multiple schemes paying parts of the charge, the breakdown should be entered in the 'Any other information' box in the main self-assessment return (SA100).

Information provided by the scheme

Scheme administrators have to provide information about the pension input amounts they've received on request and automatically in certain circumstances.

Information provided automatically

If a member's pension input amount under a scheme is more than the £60,000 standard annual allowance, or if they've triggered the MPAA and the money purchase input amount is more than £10,000, the scheme administrator must produce a pensions savings statement showing the pension input amounts the scheme has received for the tax year concerned and each of the three previous tax years. This information must be given by 6 October following the end of the relevant tax year.

If the input amount to a scheme is more than an individual's tapered annual allowance, but has not exceeded the full standard allowance, there is no requirement for an automatic statement.

Information on request

If a member asks for any of the above information, the scheme administrator has to provide it within three months (or by 6 October following the tax year in which the PIP ended if later).