How much can you pay into a pension? Annual allowance, carry forward and the traps

There's no limit on how much you can put into a pension. There is a limit on how much attracts tax relief without a tax charge. Two limits matter for most people.

Limit 1: your earnings

Your own contributions only get tax relief up to 100% of your "relevant UK earnings" in the tax year (broadly, earnings from employment or self-employment — not rental income, dividends or pension income). If you have no earnings, you can still contribute up to £2,880 a year, which the government tops up to £3,600.

Employer contributions aren't restricted by your earnings — a point that matters a lot for company directors.

Limit 2: the annual allowance

The annual allowance is £60,000 per tax year. This covers everything going into your pensions: your contributions, the tax relief added, and anything your employer pays. Go over it and a tax charge claws back the relief on the excess.

Carry forward: the catch-up rule

Unused annual allowance from the three previous tax years can be carried forward, provided you were a member of a registered pension scheme in those years. This is genuinely powerful — someone who has been under-contributing for years could potentially put a large lump sum in (for example after a bonus, an inheritance or a business sale) and get tax relief on all of it, subject to their earnings.

The current year's allowance is used first, then the earliest of the three carry-forward years.

The tapered annual allowance: a trap for high earners

If your income is high enough, your annual allowance shrinks. Broadly, if your "threshold income" exceeds £200,000 and your "adjusted income" (which includes employer pension contributions) exceeds £260,000, your allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000.

The definitions of threshold and adjusted income are fiddly, and this is an area where getting a calculation wrong is expensive. If you're anywhere near these numbers, take advice.

The MPAA: the trap for people who've dipped in

Here's the one that catches people out. Once you take taxable money flexibly from a defined contribution pension — for example, income from drawdown or a lump sum where 75% is taxed — your annual allowance for future contributions to defined contribution pensions drops to £10,000, permanently. This is the Money Purchase Annual Allowance (MPAA), and you also lose the ability to use carry forward for DC contributions.

Taking just your 25% tax-free cash, or buying a standard lifetime annuity, does not trigger the MPAA. But many people trigger it without realising — dipping into a pension at 55 while still working, then finding they've capped their ability to rebuild it.

If you're over 55, still working, and thinking of taking anything from a pension: understand the MPAA first.

This article is for general education only and isn't personal advice. Pension contribution planning around the taper, carry forward or the MPAA is exactly the kind of thing worth getting checked — get in touch if you'd like to talk it through.