The Annual Allowance: How Much Can You Put Into Your Pension Each Year?

The annual allowance is one of the most important rules in pension planning, and getting it wrong can result in an unexpected tax charge. Here's everything you need to know.

What Is the Annual Allowance?

The annual allowance is the maximum amount you can contribute to all your pensions in a single tax year while still receiving tax relief. The current limit is £60,000, or 100% of your earnings, whichever is lower. This was increased from £40,000 in April 2023. Full details are available on the HMRC pension annual allowance page.

Crucially, this limit includes all pension contributions - your personal contributions, employer contributions, and any contributions from third parties. If your employer contributes £10,000 and you contribute £30,000, that's £40,000 used against your annual allowance.

The Earnings Cap

Your annual allowance is capped at 100% of your UK earnings. So if you earn £25,000, you can only contribute £25,000 to your pension, even though the general allowance is £60,000.

For most people earning above £60,000, this isn't an issue - the £60,000 cap applies first. But for part-time workers, those on career breaks, or people with low earnings, the 100% earnings rule is the binding constraint.

There's a special provision for non-earners: you can contribute up to £3,600 gross (£2,880 net of basic rate tax relief) even if you have no earnings at all.

The Tapered Annual Allowance

High earners face an additional restriction. If your "adjusted income" exceeds £260,000, your annual allowance starts to taper down. For every £2 of income above £260,000, you lose £1 of annual allowance, down to a minimum of £10,000.

This means if you earn £360,000 or more, your annual allowance is just £10,000. The taper catches senior employees, company directors, and professionals with high earnings. It's worth noting that "adjusted income" includes employer pension contributions, so the total picture matters.

Carry Forward

If you haven't used your full annual allowance in previous tax years, you can carry forward unused allowance from the last three years. This is one of the most powerful features of the pension system.

To use carry forward, you must have been a member of a registered pension scheme in the tax year from which you're carrying forward (even if you made no contributions). The current year's allowance is used first, then you go back through each year in order.

This is particularly useful for people who receive bonuses, have variable income, or who want to make a large one-off contribution. For example, if you've contributed nothing for the past three years and you earn over £60,000, you could potentially contribute up to £240,000 in a single year.

The Money Purchase Annual Allowance

If you've already started taking income from a defined contribution pension (through flexi-access drawdown or an uncrystallised funds pension lump sum), your annual allowance for further contributions drops to just £10,000. This is the Money Purchase Annual Allowance (MPAA).

The MPAA doesn't apply if you've only taken your tax-free lump sum, or if you're taking income from a defined benefit scheme. But it does mean that once you start accessing your pension flexibly, your ability to make further contributions is significantly reduced.

What Happens If You Exceed the Allowance?

If your total contributions exceed your annual allowance (including any carry forward), you'll face an Annual Allowance Charge. This is essentially added to your income and taxed at your marginal rate.

The pension scheme will tell you if you've exceeded the allowance (they have to report it to HMRC), and the charge is declared on your self-assessment tax return.

Use our SIPP calculator to model your contributions and ensure they stay within the annual allowance. If your situation involves the taper or carry forward, a financial adviser can help you optimise your contributions.