Update to Money Purchase Annual Allowance - what you need to know

What is the pension annual allowance?

The standard annual allowance is the total amount you can normally pay into your pension without facing a tax charge. It’s currently set at £40,000 each tax year. The annual allowance can always change and has been significantly cut over the past few years.

How does the pension annual allowance work?

  • If you have a defined contribution pension, it applies to the total amount you pay into your pension
  • Any payments made into your pension by your employer or anyone else also count towards your annual allowance – unless you have a defined benefits (final salary) pension
  • If you have a defined benefits pension, it applies to the increase in your pension benefit over the year, multiplied by 16
  • Your personal contributions are limited to your earnings in the tax year, even if they are lower than the annual allowance. However, your employer can make unlimited contributions to your pension regardless of whether you are in a defined benefit or defined contribution scheme

Annual allowance reduced for higher earners

Depending on your total income, your annual allowance could drop to as little as £10,000 a year. If your total income is more than £150,000 take a look at the table below.

Your total income

Your annual allowance

Up to £150,000 £40,000
£160,000 £35,000
£170,000 £30,000
£180,000 £25,000
£190,000 £20,000
200,000 £15,000
£210,000+ £10,000


Your total eligible income includes your salary and any other income you receive in the same tax year, such as:

  • Your pension contributions
  • Any employer contributions
  • Dividends
  • Savings interest
  • Bonuses or sales commission
  • Any rent you receive

If your estimated income fluctuates throughout the tax year, so could your annual allowance.


There are exceptions to this and not everyone will see their annual allowance reduce. There's a second test which can help some people who have contributed more than £40,000 in the tax year. This looks at the ‘threshold’ income and takes into account your pension contributions. If your threshold income is £110,000 or under after deducting your pension contributions, you can still benefit from the full £40,000 annual allowance.

Reduced allowance if you have accessed your pension

A reduced annual allowance of £4,000 applies if you have taken money out of your pension beyond your 25% tax free cash. So make sure you’re happy with your pension savings before taking an income.

5 tips to make the most of your pension annual allowance

1. Make the most of tax relief while you can

To encourage you to save for the future, the Government currently gives you a tax break on contributions you make to your pension. This tax relief is at the highest rate of income tax that you pay. Consider making the most of it while you can as relief at higher rates may not be around forever. Read our guide: Maximising pension tax relief

2. Use up any allowances from previous tax years

Start by getting a Pension Savings Statement from your provider(s) so you can see all your unused allowances. If you haven’t used your full annual allowance in any of the last three tax years you may be able to pay more into your pension this year and benefit from tax relief.

Tax year

Annual allowance

2013/14 £50,000
2014/15 £40,000
2015/16 – Period 1
Contributions before 9 July 2015
2015/16 – Period 2
Contributions after 8 July 2015


  • You must have a pension in place in each of the carry forward years you are using
  • Your earnings match or are more than the amount you are contributing

*You can only benefit from Period 2 if you contributed to your pension in Period 1. In Period 2 you can use as much of your allowance left in Period 1 up to a maximum of £40,000.

3. Increased benefits with salary sacrifice

If you’re an employee using salary sacrifice (sometimes called salary exchange), you’re already benefiting from tax relief and you’re also making a saving on your National Insurance contributions.

Salary sacrifice is actually quite simple. You agree to change your contract to give up part of your salary in return for an extra pension contribution from your employer.

As your salary is reduced, both you and your employer pay less National Insurance. What’s more, using salary sacrifice means basic rate taxpayers can enjoy combined tax and NI savings of 32% on their pension payments, so a £100 pension top-up only costs £68. Higher rate taxpayers get 42% tax and NI savings from salary sacrifice, meaning it only costs £58 to add £100 to your pension. Additionally, the employer saves NI too, some of this could be passed on as an extra pension top-up.

These figures are based on England, Wales and Northern Ireland. Different tax rates and bands apply to Scottish residents.

4. Rethink your ISA

If you don’t have the spare income available to maximise your annual allowance you could consider using some of your other savings. Pension freedoms mean that you can now access your pension fund from age 55. And so, once you have reached this age you can access your pension or ISA funds with ease. If you are 55 or over, you may want to consider putting your ISA savings into your pension to take advantage of the tax relief available to you.

If you are a basic rate tax payer, £100 in your ISA could be worth £125 in your pension due to tax relief. And if you are a higher rate tax payer, for the same net cost, a £100 ISA contribution could be worth £166 in your pension. Though withdrawals from your pension are taxable, the 25% tax free allowance on your pension means if you’re a higher rate taxpayer when you make your pension contribution you would still end up with more money in your hand than if you left it in your ISA.

Basic rate taxpayers will also enjoy more money in their pocket by moving their ISA into their pension provided they don’t pay higher rate tax on the pension income, which could be the case if you access all your pension savings in one go rather than spread over a number of years.

Before making any decisions, you need to think carefully whether this approach is right for you and your personal tax situation. Should you need access before age 55, keeping it in an ISA may be a better solution.

Of course your pension is invested and the value can go up as well as down and you could get back less than you paid in.

5. Get a clear view of your total pension savings

To make the most of your annual allowance you need to have a clear view of all your pensions. You could consider bringing your pensions together. This is especially important if you have an older pension that may not give you full flexibility when the time comes to access your savings. Transferring isn’t always the best choice for everyone. You should always check you’re not going to lose any special features or guarantees.

Make your pension work harder today

Pension Calculator

See how contributing a little more now can make a big difference later

The value of investments can go up and down. It’s possible they may be worth less than was invested.

Remember, tax rules and legislation can change and the value of tax benefits depends on your individual circumstances. This information is based on our understanding in April 2018.

Access to impartial guidance

We recommend you seek appropriate guidance or advice before you make any decisions. An adviser may charge a fee for this. You can also get free impartial guidance over the phone or face to face with Pensionwise. Go to pensionwise.gov.uk or call 0800 138 3944. Make sure you understand all your retirement options by reading the Money Advice Service guide – Your pension - it’s time to choose

Pensionwise banner

Keep up-to date with the latest retirement news and expert opinion.


Find out how to make to make the most of your pension options.


Explore our fixed income and flexible income options.


Take a look at pensions and retirement FAQs.


Attend one of our events to learn more about your retirement options.