Pension Annual Allowance: Maximising Your Tax Relief
The pension annual allowance limits how much you can contribute with tax relief. But with carry forward rules and the higher limit since 2023, there's more opportunity than ever to boost your pension.
The Current Annual Allowance
As of 2023/24, the standard annual allowance is £60,000—a significant increase from the previous £40,000 limit.
This is the maximum total pension contributions (yours plus employer's) that qualify for tax relief in a single tax year.
What Counts Toward the Allowance
- Your personal contributions (including salary sacrifice)
- Employer contributions
- Contributions to all your pensions combined
For defined benefit schemes, it's calculated as the increase in the value of your benefits, not actual contributions.
The Tax Relief Benefit
Pension contributions get tax relief at your marginal rate:
| Tax Band | Contribute | Net Cost After Relief |
|---|---|---|
| Basic rate (20%) | £10,000 | £8,000 |
| Higher rate (40%) | £10,000 | £6,000 |
| Additional rate (45%) | £10,000 | £5,500 |
Basic rate relief (20%) is added automatically to your pension. Higher and additional rate taxpayers claim the extra relief through self-assessment.
Carry Forward: Use Unused Allowance
Didn't use your full £60,000 this year? You can carry forward unused allowance from the previous three tax years.
To use carry forward:
- You must have been a member of a registered pension scheme in the year you're carrying forward from
- You must have taxable earnings at least equal to your contribution (or £3,600, whichever is higher)
- Use the current year's allowance first, then carry forward in order (oldest first)
Example: You've used only £30,000 of allowance in each of the last three years. You now have £90,000 of carried forward allowance (3 × £30,000 unused) plus this year's £60,000 = potentially £150,000 you could contribute this year.
This is particularly useful for:
- Receiving a bonus or windfall
- Selling a business or asset
- Returning to high earnings after a lower-income period
Tapered Annual Allowance
High earners face a reduced allowance. If your "threshold income" exceeds £200,000 AND your "adjusted income" exceeds £260,000, your allowance is tapered.
The taper reduces the allowance by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000 (reached at adjusted income of £360,000).
The Income Definitions
- Threshold income: Roughly your taxable income minus personal pension contributions
- Adjusted income: Threshold income plus employer pension contributions (and other pension accrual)
If your threshold income is below £200,000, the taper doesn't apply—regardless of how high your adjusted income is.
Money Purchase Annual Allowance (MPAA)
Once you flexibly access your pension (take taxable income from it), your annual allowance for future contributions drops to just £10,000.
Taking your 25% tax-free lump sum alone doesn't trigger MPAA. But taking any taxable income from a defined contribution pension does.
Exceeding the Annual Allowance
Go over your allowance and you face an annual allowance charge:
- The excess is added to your income
- Taxed at your marginal rate
- Reported via self-assessment
For large excesses (over £40,000), you can ask your pension scheme to pay the charge from your pension pot ("scheme pays").
Contribution Strategies
Salary Sacrifice
Exchange salary for employer pension contributions. You save income tax AND National Insurance (12% or 2%). The employer saves NI too—and good employers pass some of that saving to your pension.
Bonus Sacrifice
Same principle applied to your annual bonus. Particularly effective for higher earners losing personal allowance or facing the 60% effective tax rate between £100,000-£125,140.
End of Tax Year Planning
Don't leave it too late. Contributions must be made by 5 April to count for the current tax year. Some employers have earlier deadlines for salary sacrifice.
How Talk Through Wealth Helps
Optimise your pension contributions:
- Track available annual allowance including carry forward
- Calculate the taper for high earners
- Model the tax savings from different contribution strategies
- Project how contributions grow into retirement income
- Balance pension contributions against other financial goals
Model Your Pension Contribution Strategy
Join the waitlist to maximise your pension tax relief.
Join the Waitlist