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    What happens if you exceed the Annual Pension Allowance?

    Many of our clients take financial advice when they’re ready to withdraw their pension funds – but our advice could help avoid tax pitfalls when saving.

    Important: This article relates to Defined Contribution (DC) pensions. If you have a Defined Benefit (DB) pension, the rules are more complex. We strongly recommend that you seek financial advice before making any decisions, as the way allowances are applied can differ significantly.

    Changes to pension Annual Allowance and IHT rules may mean that some people will change how they save for the future – for example, clients faced with a tax charge may reduce or pause pension saving. We feel it’s worth reviewing the rules around pension allowances to save tax-efficiently.

    What is your Annual Pension Allowance?

    You can contribute as much as you like to your pensions each year. But there is a limit to how much you can contribute tax efficiently. (For most people) the Annual Allowance is £60,000 and includes all contributions you make to your Defined Contribution schemes, as well as those made by your employer or other third parties.

    The Annual Allowance applies to DB schemes too. Instead of counting contributions, HMRC measures the pension input amount (the growth in your promised benefits) against your Annual Allowance. For most people the Annual Allowance is £60,000 in 2025/26, but it can be lower if the taper or the Money Purchase Annual Allowance (MPAA) applies.

    The Annual Allowance for higher rate tax payers

    If your Annual Allowance is exceeded in a tax year, an ‘Annual Allowance charge’ will apply to the excess which must be paid by you unless it’s possible for the charge to be paid by your pension scheme (‘scheme pays’). If you’re able to use carry forward and your unused annual allowances are sufficient to cover the ‘excess’, no annual allowance charge would apply.

    For higher earners, their Annual Allowance could be reduced below £60,000 and can reach as little as £10,000 due to the Tapered Annual Allowance, reducing their Annual Allowance by £1 for every £2 of ‘adjusted income’ above £260,000, if their ‘threshold income’ is over £200,000.

    It’s important to note that, irrespective of how much annual allowance or carry forward you might have available, you can only get tax relief on your own contributions if they don’t exceed your earnings (salary, bonus etc) in the tax year of payment of the contribution.

     

    Exceeding Pension Annual Allowance

    Receiving an Annual Allowance tax charge doesn’t mean you have to stop saving into your pension. Exceeding the Pension Annual Allowance may be the most tax-efficient way to save for your future. Some benefits include:

    • Inside a pension, investments grow free of UK income and capital gains taxes.
    • Some workplace pensions offer generous employer pension contributions so those may cease if employees stopped paying into the scheme.
    • Higher earners with limited alternatives for tax-efficient savings options can still consider pension contributions.
    • Savers approaching retirement can choose to exceed their Annual Allowance to maximise pension savings.

    Before making further pension contributions once the Annual Allowance has been reached, we must also consider how pension funds will be taxed when they are withdrawn.

     

    Managing your Pension Annual Allowance

    To make the most of your Annual Allowance, you should consider how much you have used, and how much you have saved in Defined Contribution Schemes:

    If you have a Defined Benefit pension, then the above may under-report your total annual contributions, and you should take advice before making any decisions.

    How to pay your Annual Allowance tax charge

    Exceeding the Annual Allowance will result in a tax charge at your marginal rate. There are a few ways to pay this:

    • Ask your pension provider – They may pay this charge from your scheme, reducing your pension benefits. However, you may prefer to…
    • Pay the charge with a Self Assessment tax return – You can calculate how much you earned and contributed to your pension in a tax year with the Gov.uk calculator, and it will tell you how much your Annual Allowance charge is.

     

    How can you calculate your pension Annual Allowance

    To work out your Annual Allowance, you will need to know how much was contributed to your DC pension schemes this tax year. This will include your contributions, and any made on your behalf – such as Employer contributions. There are a few questions you can ask yourself to check if you’ve exceeded your Annual Allowance:

    1. Have you accessed benefits, other than tax free cash, from a Defined Contribution pension scheme?

     

    1. Is your threshold income (your taxable income without your own pension contributions) less than or equal to £200,000?
    • Yes – the standard Annual Allowance applies, £60,000. Continue to question 3.
    • No – learn more about the Tapered Annual Allowance.

     

    1. Have you (or others on your behalf) contributed more than £60,000 to your pension in this tax year?
    • Yes – You may be able to use ‘Carry Forward’ rules to make use of unused allowances.
    • No – It is unlikely that you have exceeded your Annual Allowance.

    Carry forward rules

    The ‘carry forward’ rule allows pension savers to build up their pension with any unused allowances from the previous three tax years, on top of the current year’s annual allowance, as long as they had a pension in place in those earlier years.

    This rule can be particularly beneficial for anyone who is self-employed, with income that changes significantly from year to year, or those who run their own business through a limited company.

    Get Annual Allowance advice from Wren Sterling

    Set up an appointment to seek advice on your Annual Allowance. If you’re unsure of how to maximise your pension funds in a tax-efficient way or want to make the most of unused allowances from previous years, our financial advisers can guide you.

    Get in touch to arrange an appointment and receive tailored financial advice that can help you make the most of your pension planning.

    Get in touch to discuss your options today

    Annual Allowance FAQ

    • What is the current Annual Allowance limit?

      What is the current Annual Allowance limit?

      The Annual Allowance is a limit to the amount you, and others on your behalf, can contribute to your Defined Contribution pensions each tax year, without suffering a tax charge (defined benefit scheme accrual is also included).

    • Does this apply to Defined Benefit pensions as well?

      Does this apply to Defined Benefit pensions as well?

      Yes, but it’s measured differently. This guide is focused on Defined Contribution pensions. Defined Benefit (DB) schemes are more complicated when it comes to Annual Allowance rules and tax charges and are measured on the growth in your promised benefits rather than contributions.  If you have a DB pension, we strongly recommend speaking with a financial adviser before making any changes.

      For DB pensions, instead of counting contributions, HMRC measures the pension input amount (the growth in your promised benefits) against your Annual Allowance. For most people the Annual Allowance is £60,000 in 2025/26, but it can be lower if the taper or the Money Purchase Annual Allowance (MPAA) applies.

    • What is the Annual Allowance tax charge?

      What is the Annual Allowance tax charge?

      If you exceed your Annual Allowance, a tax charge will apply to the excess. You must usually report any excess and charge on your Self Assessment return for the relevant tax year.

      You can pay this through your self-assessment tax return or possibly from your pension scheme.

    • What is the Money Purchase Annual Allowance and when is it triggered?

      What is the Money Purchase Annual Allowance and when is it triggered?

      The Money Purchase Annual Allowance (MPAA) applies when you start to flexibly access your Defined Contribution (DC) pension. Once triggered, the MPAA reduces the amount you can contribute to DC pensions each tax year without suffering a tax charge from the standard Annual Allowance to £10,000 (correct for the 2025/26 tax year).

    • Does exceeding the Money Purchase Annual Allowance trigger a tax charge as well?

      Does exceeding the Money Purchase Annual Allowance trigger a tax charge as well?

      Yes. Those who have begun to access their pension benefits by taking more than their tax free cash, but continue to contribute to their DC pensions (often through workplace schemes) need to take care not to exceed the MPAA. This will trigger a tax charge, which can be paid through a self-assessment tax return or , in some, cases from the pension scheme.

    *The clients’ names in this scenario have been changed.

    This article is for information only and does not constitute advice. The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. The Financial Conduct Authority does not regulate tax advice.

    A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.