Annual Allowance, Taper, and MPAA

The standard Annual Allowance

The pension Annual Allowance is the maximum total amount that can be contributed to all your pensions in a tax year while attracting tax relief at your marginal rate. For 2026/27 the standard allowance is £60,000. “Total contributions” means everything: your own contributions, your employer's, third-party contributions (a relative paying in on your behalf), and the deemed value of any Defined Benefit accrual (calculated as 16 times the increase in your DB pension entitlement over the year, plus any lump sum from the same scheme, less an inflation uprate).

Contributions above the allowance attract the Annual Allowance Charge: the excess is added to your taxable income for the year and taxed at your marginal income tax rate. For a higher-rate taxpayer, that is 40% on the excess; for an additional-rate taxpayer it is 45% (47% in Scotland). The mechanism means that, for the very-high earner who would otherwise contribute £80,000 in a year, the marginal £20,000 above the £60,000 allowance receives tax relief on the way in but is taxed at the same marginal rate on the way out (via the AAC) - net tax relief on the excess is zero. The effective ceiling on tax-advantaged contributions is therefore the £60,000 allowance.

Carry-forward, the relieving valve

If your contributions in a tax year exceed the Annual Allowance, you can use carry-forward of unused allowance from the previous three tax years. To use carry-forward you must have been a member of a registered UK pension scheme in each of those years (you do not have to have actually contributed). Carry-forward is applied in chronological order: use the oldest year first.

The practical effect is that anyone who has contributed below the allowance in recent years can make a substantially larger contribution in a single year without triggering the AAC. A saver who contributed nothing in 2023/24, 2024/25, and 2025/26 can carry forward £180,000 (three years at £60,000) plus the current £60,000, total tax-advantaged contribution capacity of £240,000 in 2026/27. This is the standard tactic for self-employed people with lumpy income, business owners distributing profits, and anyone receiving a large bonus or windfall who wants to maximise pension contributions. There is a separate limit: contributions cannot exceed 100% of your relevant UK earnings in the year you make the contribution, so the £240,000 carry-forward example only works for someone earning £240,000+ in 2026/27.

The tapered Annual Allowance for high earners

For very high earners, the Annual Allowance tapers down. The 2026/27 taper applies to anyone whose “adjusted income” (essentially total taxable income plus their own and employer pension contributions) exceeds £260,000 and whose “threshold income” (essentially total taxable income excluding own pension contributions) exceeds £200,000. The allowance reduces by £1 for every £2 of adjusted income above £260,000, with a floor of £10,000.

Worked example: a saver with £320,000 adjusted income has a tapered allowance of £60,000 − ((£320,000 − £260,000) ÷ 2) = £60,000 − £30,000 = £30,000. A saver with £400,000 adjusted income has £60,000 − £70,000 (capped at £50,000 reduction) = £10,000 floor.

The taper is particularly punishing for NHS consultants, partners in legal and consultancy firms, and senior executives in financial services. The interaction with DB accrual (where the deemed value of DB benefits can push a saver into the taper even if they have not made large DC contributions) was a major political issue for NHS workforce planning in the late 2010s and was one of the reasons for the abolition of the Lifetime Allowance and the increase of the standard AA to £60,000 from April 2023. The taper remains, and remains material.

The Money Purchase Annual Allowance, the trap

The Money Purchase Annual Allowance (MPAA) is the most easily overlooked rule in the UK pension system. It applies to anyone who has flexibly accessed any DC pension, that is, taken any taxable income from a DC pension via UFPLS, flexi-access drawdown, an annuity from a flexi-access drawdown fund, or certain other triggers. Once flexibly triggered, your maximum tax-relieved DC contribution falls to £10,000 per year for the rest of your life.

Crucially, the MPAA applies only to DC contributions. DB accrual continues to use the standard (or tapered) Annual Allowance. But for anyone who took an ad-hoc taxable lump sum from a small old workplace pension in their fifties, perhaps to pay off a mortgage or fund home improvements, and then continued working with a workplace DC pension, the MPAA can quietly turn what looked like a good idea into a costly tax error. A 56-year-old taking a £20,000 taxable UFPLS withdrawal from an old pension, then continuing to work earning £100,000 with a 5%/10% employer-matched workplace pension, finds that their £15,000-per-year workplace contribution now triggers a £5,000 MPAA breach every year for the rest of their working life, attracting a £2,000 (40%) Annual Allowance Charge each year.

The MPAA is not triggered by taking the 25% tax-free lump sum on its own (called a “tax-free cash recycling” trigger only in extreme cases), by buying a lifetime annuity from an annuity fund (not a drawdown fund), by taking only small pots under the “small pots” rules, or by continuing DB accrual. If you are unsure whether you have triggered the MPAA, your pension provider will have sent you a notification within 31 days of the triggering event, if you did not retain it, contact the provider for a duplicate.

Scottish income tax interactions

Scottish income tax bands differ from rest-of-UK bands. A Scottish saver in the “intermediate” band (21% in 2026/27) receives marginal tax relief on personal pension contributions at the Scottish rate, but the carry-forward and Annual Allowance figures themselves are reserved-to-Westminster and apply identically across the UK. The Annual Allowance Charge on excess contributions is levied at the Scottish marginal rate, which means Scottish higher-rate and top-rate taxpayers (42% / 45% / 47% in 2026/27) pay the AAC at a higher rate than rest-of-UK peers. This is an emerging area of complexity for cross-border employees and one where MoneyHelper / FCA-regulated advice is particularly worth seeking.

Reporting and the AAC payment process

If you breach the Annual Allowance, you must report it on a Self Assessment return for the year of breach. There are two payment routes: pay the AAC personally as a tax liability via Self Assessment, or use “Scheme Pays” to instruct your pension scheme to settle the AAC by reducing your future pension benefits. Scheme Pays is mandatory for charges above £2,000 where the breach is on the standard Annual Allowance, schemes are statutorily required to offer it. For tapered-allowance breaches the rules are stricter and Scheme Pays may not be available depending on the scheme's small-print. Always check your scheme's Annual Allowance reporting deadline (typically 31 July of the year after the tax year) and your Self Assessment deadline (31 January) to avoid late-payment interest.

Sources

• HMRC, Annual Allowance
• HMRC, Tapered Annual Allowance
• HMRC, Pensions Tax Manual
• MoneyHelper, Pensions and retirement guidance

This guide is for general information only and does not constitute financial advice. Annual Allowance, taper, and MPAA interactions can be complex and the consequences of breaching are material. Consult an FCA-regulated adviser if you are within range of any of these limits.