The pensions annual allowance is the headline limit on how much can be contributed to UK registered pension schemes each tax year without triggering an income tax charge. For most savers it sits at £60,000 — but for high earners a tapering mechanism cuts it down sharply, and breaching the threshold without realising can produce unexpected tax bills that wipe out the benefit of contributing in the first place.
The headline rules
Total contributions to all your pension schemes — your own, your employer's, and any salary sacrifice — must not exceed £60,000 in a tax year (or 100% of your relevant UK earnings if lower). Contributions above the limit trigger an "annual allowance charge" at your marginal income tax rate, effectively clawing back the tax relief on the excess.
Contributions count gross. A £4,000 personal contribution into a SIPP becomes £5,000 gross after basic-rate relief at source, and £5,000 is the figure that counts against your allowance.
Tapering for high earners
If your adjusted income exceeds £260,000 in a tax year, your annual allowance is reduced by £1 for every £2 above the threshold, to a minimum of £10,000. The taper bites fully at £360,000 of adjusted income.
"Adjusted income" is broadly your total taxable income plus your employer's pension contributions. So a senior employee earning £250,000 of salary with a £30,000 employer pension contribution has adjusted income of £280,000 — and a tapered allowance of around £50,000 (£60,000 minus half of £20,000).
A separate "threshold income" test (income excluding personal pension contributions, broadly above £200,000) acts as a gateway — taper only applies if both adjusted income exceeds £260,000 and threshold income exceeds £200,000. This protects employees whose adjusted income is high purely because of a large employer contribution they personally cannot influence.
The Money Purchase Annual Allowance (MPAA)
If you have already started drawing flexible income from a defined contribution pension (typically by using flexi-access drawdown beyond the 25% tax-free element), your annual allowance for future defined-contribution contributions falls to £10,000. This is the MPAA and it cannot be tapered further. Many directors are caught out by this when they take a small income drawdown without realising it permanently reduces their contribution capacity.
Worked example
For example, a finance director earning £220,000 with a £40,000 employer pension contribution has threshold income around £220,000 and adjusted income around £260,000 — right at the gateway. The next year, salary rises to £250,000 and bonus pushes total income to £290,000. Adjusted income is now £330,000, the taper kicks in, and the allowance falls to £25,000. The £40,000 employer contribution suddenly produces a £15,000 excess and an annual allowance charge of around £6,750 at higher rates.
This is the kind of mismatch we model in advance during a tax planning review so contribution levels are aligned with allowance, not chasing it after the year-end.
How to manage it
- Calculate threshold and adjusted income every spring before year-end so contributions can be flexed.
- Use carry forward from the previous 3 tax years if your allowance has been under-used.
- Consider stopping or reducing employer contributions in high-bonus years and topping up in lower years.
- Be careful with flexible drawdown — triggering the MPAA before you intend to stop earning is rarely a good trade.
What to do next
If your total income (salary + bonus + dividends + employer pension) is approaching £260,000 in any tax year, the tapered allowance applies and contributions need to be sized accordingly. Book a high earner pension review with PushDigits — we model your position alongside your Self Assessment return so nothing surprises you in January.