What is the pension annual allowance?

This is the amount that can normally be paid, by you or your employer, into your pension in a tax year without facing a tax charge. The standard annual allowance is currently set at £40,000. However, some high earners and people who have started taking benefits may have a lower allowance.

If your annual allowance hasn’t been used up in any of the previous three tax years, it may be possible to carry forward the unused allowance. This will allow you to pay more in the current tax year.

The amount you can pay personally may be further limited, however. This is because you only get tax relief on payments up to 100% of your earnings in a single tax year (or £3,600 if your earnings are lower).

For example, if your annual allowance is £40,000 but your earnings are £25,000, the most that you can personally pay is £25,000. Your employer’s payments are not limited by your earnings.

If you’re a member of a defined benefit scheme (also known as a final salary scheme) it’s the increase in the value of your benefits that’s tested, not the actual amount paid. Ask your scheme for the figures

Reduced annual allowance for high earners

If your ‘adjusted income’ (total income plus the value of any employer payments) is more than £150,000, your annual allowance will be reduced by £1 for every £2 of adjusted income over £150,000. This will continue until your allowance reaches £10,000.

So, as an example, if your adjusted income is £210,000, you will see your annual allowance cut by £30,000.

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

     • Pension income
     • Dividends
     • Savings interest
     • Bonuses or sales commission
     • Rental income

The table below gives an idea of how the annual allowance can be affected:

Adjusted income

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



You will retain the full £40,000 annual allowance, however, if your ‘threshold income’ is £110,000 or less. Your threshold income is your total income minus any contributions you pay personally into your pension in the tax year. Your employer payments don’t count towards your threshold income unless they’re in respect of a new salary sacrifice arrangement which started after 8 July 2015.

Money purchase annual allowance

If you have taken more than your tax free cash from your pension, you may have a reduced annual allowance of £4,000 for defined contribution scheme. However, there are some exceptions. For example, buying an annuity or receiving a defined benefit pension won't trigger the reduced allowance.

5 tips to make the most of your pension annual allowance

1. Make the most of tax breaks 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 normally 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.

Of course, when paying into your pension it’s important to remember that your pension is invested and can go down as well as up. It’s possible that you could get back less than you paid in. Read our guide: Maximising pension tax breaks

2. Use up any allowances from previous tax years

Start by getting a Pension Savings Statement from your pension provider(s). This will show you what has been paid in the previous three tax years, and help you work out your unused allowance. If you haven’t used your full annual allowance in any of those years, you may be able to carry it forward. Doing this would allow you, or your employer, to pay more into your pension this year.


  • You must have been a member of a pension scheme in each of the carry forward years you are using
  • The maximum you can pay personally is limited to 100% of your current tax year earnings, even if you have unused allowances

3. Increased benefits with salary exchange

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

As your salary is reduced, both you and your employer pay less National Insurance. What’s more, using salary exchange means you can normally enjoy combined tax and NI savings on your pension payments. For basic rate taxpayers, the saving could be 32%, for higher rate taxpayers up to 42% and for additional rate taxpayers up to 47%.

These figures are based on England, Wales and Northern Ireland. Different tax bands and rates apply in Scotland.

Additionally, your employer saves NI too. Some of this could be passed on as an extra pension top-up.

Paying by salary exchange reduces your salary and may affect other benefits, transactions and borrowing levels that are based on your salary.

4. Rethink your ISA

If you don’t have the spare income available to maximise your pension savings, you could consider using some of your other life savings. You can now access your pension from age 55 (subject to change), so you may want to consider putting your ISA savings into your pension to take advantage of tax relief. What's more, unlike your ISA, your pension pot is generally outside of your estate for inheritance tax purposes.

Think about doing this while you're still working because, if you have no earnings, the most you could pay in each tax year is £3,600.

Before making any decisions, it’s important to consider whether this approach is right for you and your individual circumstances. If you need to access savings before age 55, keeping it in an ISA may be a better solution.

5. Get a clear view of your total pension savings

To maximise your pension savings, it may help to have a clear view of all of your pensions. You could consider bringing them together. Which also makes managing things easier.

Consolidating pensions will not be right for everyone, however. You need to consider all the facts and decide if it is right for you. If you’re unsure about transferring, you should seek financial advice.

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The value of investments can go down as well as up. 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

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