What is the pension tapered annual allowance?

If you’re a high earner, you may have encountered the tapered annual allowance.

The taper, as it’s known for short, restricts the amount you can save into your pension each year without facing an annual allowance tax charge.

For the 2026/27 tax year, the tapered annual allowance can apply if your ‘threshold income’ is more than £200,000 and your ‘adjusted income’ is more than £260,000. Adjusted income includes pension contributions made by you or your employer, so it is not simply a measure of your salary.

While the taper only impacts a fraction of the population, it poses a major headache for those restricted by it.

Not only does the taper squeeze what you can save for your retirement, but the rules are complex; staying within the required limits isn’t always straightforward.

If you’re not careful, you could end up with a tax charge if your pension savings exceed your available annual allowance.

However, you may be able to use unused annual allowance from the previous three tax years to increase the amount you can save without facing a charge.

What is the tapered annual allowance?

Before we get to the taper, let’s start with the standard annual allowance, which is the amount that can normally be added to your pensions each tax year without triggering a tax charge.

For most people, £60,000 for the 2026/27 tax year. This includes contributions made by you and your employer, as well as increases in the value of benefits in a defined benefit pension.

There is a separate limit on tax relief for your own pension contributions. You can normally receive tax relief on contributions up to 100% of your relevant UK earnings, subject to the annual allowance.

For example, if you earn £70,000 a year, you could personally contribute up to £70,000 and qualify for tax relief based on your earnings, but contributions above the £60,000 annual allowance could result in an annual allowance charge unless you have unused allowance to carry forward.

. But if your annual wage is £45,000, tax relief on your own contributions would normally be limited to £45,000.

However, the standard annual allowance rules do not apply to everyone.

If you’re a particularly high earner, your allowance could be reduced to as little as £10,000 due to the tapered annual allowance, which was introduced in April 2016 by then-chancellor George Osborne.

At the time, it affected individuals with threshold income exceeding £110,000 and adjusted income topping £150,000, but these levels have since risen to £200,000 and £260,000, respectively.

What do threshold and adjusted income mean?

This is where things start to get a bit complicated.

Here’s a summary of the difference between threshold and adjusted income.

If you're ever in the process of trying to calculate your tapered annual allowance, it’s worth enlisting the expertise of a financial adviser to make sure you arrive at the right figure.

What are the changes to the tapered annual allowance?

In April 2020, in recognition of some NHS doctors reducing working hours to avoid hitting the taper, the limits for threshold and adjusted income subsequently rose to £200,000 and £240,000, respectively.

Other changes were less favourable. The government also reduced the minimum allowance to £4,000. 

The rules changed again from April 2023, after Jeremy Hunt announced reforms to various pension allowances within his Spring Budget.  

The chancellor restored the minimum taper to £10,000, while the threshold for adjusted income leapt £20,000 to £260,000. 

How does the pension taper work?

The amount you can pay into pension tapers if you breach both the threshold income and adjusted income limits.

Here’s a handy table summarising the rules.

Once your threshold income exceeds £200,000, your allowance reduces by £1 for every £2 your adjusted income rises above £260,000.

The minimum this can taper to is £10,000. 

So, if your adjusted income for the current tax year is £290,000 - thus exceeding the minimum limit by £30,000 - your annual allowance would drop £15,000 (£30,000/2) to £45,000.

What might the tapered annual allowance mean for me?

Currently, the minimum that the tapered allowance will fall to is £10,000, which happens once your adjusted income reaches £360,000.

Here's an example of how the tapered annual allowance works.

Nicola has an adjusted income of £320,000 a year. To calculate her tapered annual allowance for the 2026/27 tax year, we follow these steps:

1. Her income is £60,000 over the £260,000 adjusted income threshold.

2. Her allowance is reduced by £1 for every £2 she is over the threshold, which amounts to a £30,000 reduction (£60,000 ÷ 2).

3. This reduces her standard £60,000 annual allowance to £30,000.

This means Nicola can contribute up to £30,000 into her pension in the 2026/27 tax year and receive tax relief.

What happens if I breach my pension taper limits?

Any pension contributions that breach your annual allowance are classed as ‘excess contributions’. 

If this were to happen, any overpayment is added to your taxable income for the year in question and taxed at your marginal rate, clawing back the upfront tax relief you received when making the contribution. 

Alternatively, you can ask your pension scheme to pay the charge, though this isn’t always possible. 

In short, any payments above annual allowance would negate the tax benefits of paying into a pension over, say, an individual savings account (ISA).

Plus your money is tied up until at least age 55, and you might be taxed on what you draw out in the future. 

Can I exceed the taper and still get tax relief?

In some cases, yes you can. This is due to something called carry forward, which allows you to bring forward any unused pension allowances from the previous three tax years. 

The total of these allowances can be added to your current year’s allowance, meaning you can pay more into a pension and get tax relief at the top rate of income tax you pay.

But you should tread carefully here. The calculation isn’t always simple - previous years' allowances might also be affected by the taper.

As outlined above, the consequences for getting it wrong and overpaying can wipe out the upfront tax benefits of paying into a pension.

Here's a summary of the key points.

Get expert financial advice 

Understanding the pension tapered annual allowance is crucial for high earners to make the most of their retirement savings while avoiding unexpected tax charges.

With a higher minimum allowance and higher income thresholds, there's more room for pension contributions than before. By staying informed and planning carefully, you can optimise your pension contributions and benefit from tax relief without running afoul of the tapering rules.

If you’re a high earner seeking to make the most of your retirement savings, it's wise to seek professional advice from a financial adviser who specialises in retirement planning. 

Let Unbiased quickly match you with a financial adviser for expert financial advice tailored to navigating complex pension rules to ensure you optimise your retirement savings and avoid unexpected tax charges.