What is the pension tapered annual allowance?
We examine how the tapered annual allowance works, what’s changed and how these changes might affect you.
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.
The tapered annual allowance reduces your standard £60,000 pension annual allowance if you are a high earner in the UK.
Your annual allowance starts to taper if you breach both the threshold income and adjusted income limits.
Currently, the minimum that the tapered allowance will fall to is £10,000, which happens once your adjusted income reaches £360,000.
If your pension savings exceed your available annual allowance you may have to pay an annual allowance tax charge.
A financial adviser can help you work out your available allowance and consider the most tax-efficient way to save for retirement.
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.
| Definition | Includes | |
|---|---|---|
| Threshold income | Your taxable income after certain deductions, including some pension contributions. | Income such as salary, bonuses, pension income, savings interest, trading profits and rental income. Certain pension contributions can be deducted when calculating threshold income, although special rules apply to some salary sacrifice arrangements. |
| Adjusted income | Your income plus the value of pension contributions made by you or on your behalf. | Your taxable income plus pension contributions, including employer contributions. For defined benefit schemes, the calculation takes account of the increase in the value of your pension benefits rather than simply contributions paid in. |
The two figures are important because both tests must be met before the tapered annual allowance applies. For 2026/27, your threshold income must be more than £200,000 and your adjusted income must be more than £260,000.
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, the government increased the threshold income limit from £110,000 to £200,000 and the adjusted income limit from £150,000 to £240,000. The changes followed concerns that the taper was contributing to senior NHS clinicians reducing their hours or retiring early because of large pension tax charges.
The government also reduced the minimum tapered annual 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.
The threshold income limit remained at £200,000, giving us the tapered annual allowance rules that still apply in the 2026/27 tax year.
How does the pension taper work?
Your annual allowance starts to taper if you breach both the threshold income and adjusted income limits.
Here’s a handy table summarising the rules.
| Income type | Threshold | Impact on annual allowance |
|---|---|---|
| Threshold income | £200,000+ | Taper may apply if your adjusted income is also more than £260,000 |
| Adjusted income | £260,000+ | Allowance reduced by £1 for every £2 your adjusted income rises above £260,000 |
| Minimum allowance | £10,000 |
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.
This assumes your threshold income is also more than £200,000.
Adjusted income | Tapered annual allowance 2026/27 |
|---|---|
£360,000 | £10,000 |
£340,000 | £20,000 |
£320,000 | £30,000 |
£300,000 | £40,000 |
£280,000 | £50,000 |
£260,000 | £60,000 |
£240,000 | £60,000 |
Here's an example of how the tapered annual allowance works.
Nicola has an adjusted income of £320,000 a year. Her threshold income is also more than £200,000, so the taper applies.
To calculate her tapered annual allowance for the 2026/27 tax year, we follow these steps:
Her income is £60,000 over the £260,000 adjusted income threshold.
Her allowance is reduced by £1 for every £2 she is over the threshold, which amounts to a £30,000 reduction (£60,000 ÷ 2).
This reduces her standard £60,000 annual allowance to £30,000.
This means Nicola has a tapered annual allowance of £30,000 for the 2026/27 tax year. Pension savings above this amount could result in an annual allowance tax charge, although she may be able to use unused annual allowance carried forward from the previous three tax years.
If you are hit by the tapered annual allowance, it’s worth considering other ways to save for retirement. A stocks and shares ISA can still shield your investments from capital gains tax and dividend tax.
What happens if I breach my pension taper limits?
If your pension savings exceed your available annual allowance, including any unused allowance you can carry forward, you may have to pay an annual allowance tax charge.
The charge is designed to claw back tax relief on pension savings above your available annual allowance. How much you pay depends on the amount by which you exceed your allowance and your taxable income.
You will normally need to work out whether you have an annual allowance charge to pay and report it to HMRC through Self Assessment.
In some circumstances, you can ask your pension scheme to pay some or all of the charge through ‘scheme pays’, although the rules and eligibility requirements vary.
Before paying more into a pension than your available annual allowance, it may be worth considering other tax-efficient ways of saving and investing, such as an individual savings account (ISA).
Money held in a pension is also normally inaccessible until you reach the minimum pension age. This is currently 55 but is due to rise to 57 from 6 April 2028, although some people have a protected pension age.
You might be taxed on what you draw out in the future.
Can I exceed the taper and still get tax relief?
The total of these unused allowances can be added to your current year’s allowance, meaning you may be able to have more paid into your pension without triggering an annual allowance charge.
However, carry forward does not increase the amount of tax relief you can receive on your own pension contributions based on your earnings. Tax relief on personal contributions is normally limited to 100% of your relevant UK earnings for the current tax year.
You should tread carefully here. The calculation isn’t always simple - previous years' allowances might also be affected by the taper.
You must also use your current year's annual allowance first, before using unused allowance from the previous three tax years, starting with the earliest year.
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.
Key point | Note |
|---|---|
Tapered annual allowance affects very high earners | The annual pension allowance could be reduced from £60,000 |
Minimum allowance | £10,000 |
Carry forward allowed | Unused annual allowance from the previous three years |
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 are affected, calculating your threshold income, adjusted income and available annual allowance – including any carry forward – can help you decide how much can be added to your pension without triggering an annual allowance charge.
If you’re a high earner seeking to make the most of your retirement savings, professional advice can be particularly valuable, as the taper rules can become complicated when employer contributions, defined benefit pensions or carry forward are involved.
A financial adviser who specialises in retirement planning can help you work out your available allowance and consider the most tax-efficient way to save for retirement.
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.
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