Annual Allowance and tax relief

How tax relief actually works, how much you can put in each year, and the traps at both ends.

Tax relief is the reason pensions beat almost every other way of saving. Money goes in before tax, grows without income or capital gains tax, and comes out with a quarter of it tax-free. Nothing else in the UK system does all three.

The catch is that the relief is limited, the limits are more complicated than they first appear, and the mechanics of how relief reaches you vary depending on the scheme you're in.

What tax relief is worth

You get relief at your marginal rate — the rate you'd otherwise have paid on that slice of income.

For a basic-rate taxpayer, £80 becomes £100 in the pension. The government adds the £20 you'd have paid in tax.

For a higher-rate taxpayer, £100 in the pension costs £60. The first 20% usually arrives automatically; the extra 20% often has to be claimed.

For an additional-rate taxpayer, £100 in the pension costs £55.

That "often has to be claimed" is the important part. Large amounts of higher-rate relief go unclaimed every year because people assume it arrives by itself. It depends entirely on which system your scheme uses.

Relief at source versus net pay

Two mechanisms, and the difference matters more than it sounds.

Relief at source. You contribute from money that has already been taxed. The provider claims 20% back from HMRC and adds it to your pot. If you're a higher or additional-rate taxpayer, the extra relief above 20% is not added automatically — you have to claim it, through a tax return or by contacting HMRC. Most personal pensions and SIPPs work this way.

Net pay. Contributions come out of your salary before income tax is calculated, so you simply pay less tax. Relief at your full marginal rate is automatic and there's nothing to claim. Most workplace pensions work this way.

Two consequences worth knowing:

Higher-rate taxpayers in relief-at-source schemes are the ones most likely to be missing relief. If you're in that position and have never claimed, it's worth checking — claims can usually be backdated several years.

Very low earners in net pay schemes can lose out entirely. Someone earning below the Personal Allowance pays no income tax, so a net pay arrangement gives them no relief. The same person in a relief-at-source scheme would still get the 20% top-up. It's a quirk of the system that penalises exactly the people who can least afford it.

Two limits on what you can pay in

Your earnings. Personal contributions get tax relief up to 100% of your relevant UK earnings for that tax year. Someone earning £30,000 can personally contribute £30,000 with relief, not more. Anyone with no earnings at all — a non-working spouse, a child — can still contribute up to £3,600 gross a year, which is £2,880 of actual money with £720 added.

The Annual Allowance. The standard allowance is £60,000 for 2026/27. This is the ceiling on everything going in across all your pensions in a tax year: your contributions, your employer's contributions, and the tax relief. It's easy to forget employer contributions count, and for people with generous employers they're often the larger part.

For defined benefit schemes, the figure counted isn't a contribution at all — it's the increase in the value of your promised benefits over the year, worked out by a set formula. A significant pay rise in a defined benefit scheme can produce a surprisingly large number.

The tapered Annual Allowance

High earners have their allowance cut. For every £2 of adjusted income above £260,000, the Annual Allowance reduces by £1, down to a floor of £10,000 once adjusted income reaches £360,000.

Two definitions do the work, and they're not the same thing:

Threshold income is broadly your income excluding pension contributions. If it's £200,000 or below, the taper doesn't apply at all regardless of anything else.

Adjusted income is broadly your income including all pension contributions, employer ones included.

Both tests matter, which is why the taper catches people who don't think of themselves as very high earners — a large employer contribution can push adjusted income up sharply even when salary alone wouldn't.

This is genuinely difficult to calculate, the figures often aren't known until after the tax year has ended, and getting it wrong is expensive. It's an area where professional help earns its cost.

The Money Purchase Annual Allowance

Take taxable income flexibly from a defined contribution pension and your allowance for future defined contribution contributions drops from £60,000 to £10,000. Permanently. It cannot be undone, and carry forward can't be used against it.

This catches people who dip into a pension while still working — often for something entirely reasonable, like helping a child with a deposit — without realising what it costs them for the rest of their working life.

It isn't triggered by everything. Taking only tax-free cash, or taking a small pot of under £10,000 in full, generally doesn't trigger it. The trap is taking taxable income. Which pot do you spend first? covers how to navigate this while still working.

If you exceed the allowance

The excess is added to your taxable income and taxed at your marginal rate, which cancels out the relief you received. You declare it on a tax return.

If the charge is large enough, you may be able to ask the scheme to pay it from your pension rather than paying it yourself — "scheme pays". Rules and deadlines apply, and the amount comes out of your pot, so it isn't free.

Before assuming you've exceeded, check carry forward. Unused allowance from the previous three tax years can often absorb a large contribution — see Carry forward.

What to actually do

Find out which relief mechanism your scheme uses. If it's relief at source and you're a higher-rate taxpayer, check whether you've been claiming the extra relief — and if not, claim it and backdate.

Count employer contributions when you're working out how much of your allowance you've used. The Pension Contribution Calculator does the arithmetic.

And if you're anywhere near the taper thresholds, get the calculation checked rather than estimated.

This article is for general education only and isn't personal advice. Annual Allowance calculations, particularly where the taper applies or where defined benefit accrual is involved, are complex and worth having checked.

If you're in the NHS Pension Scheme

The NHS annual allowance calculator walks through the 2026/27 position step by step, and each of these links opens it at the relevant step: