The annual allowance caps how much can go into your pensions tax-efficiently each year, counting your contributions, your employer's, and basic-rate relief.
The pension annual allowance is the ceiling on how much can flow into your pensions each year while still attracting tax relief. For 2025/26 it is £60,000, but that figure includes everything: your contributions, your employer's, and the tax relief on top. Exceed it without using carry forward and HMRC claws back the relief through an annual allowance charge.
For a defined-contribution (pot-based) pension, the allowance counts the total gross amount paid in during the year: your own contributions grossed up for relief, plus anything your employer pays. For a defined-benefit (final salary) pension, it is based on the increase in the value of your promised benefits, not cash paid in.
The annual allowance works alongside, but separately from, pension tax relief. Relief tells you how much the government tops up; the annual allowance tells you how much you can put in before that relief is withdrawn via a charge. You can model both in our pension planner.
Suppose Daniel earns £80,000 and wants to make a large one-off pension contribution after a good year. His employer pays £4,000 into his workplace pension during 2025/26, and Daniel has made no other contributions.
His standard allowance is £60,000, of which £4,000 is already used by his employer, leaving £56,000 of headroom this year.
Daniel also had unused allowance in the previous three years: £20,000, £30,000, and £25,000 unused respectively, totalling £75,000 available to carry forward. Added to this year's £56,000, he can contribute up to £131,000 gross in 2025/26 with full relief, as long as it does not exceed 100% of his relevant earnings (£80,000). So his contribution is in practice capped by his £80,000 earnings, not the allowance.
This is why carry forward matters: without it, Daniel would be limited to the £56,000 of current-year headroom. With it, his earnings become the binding limit instead.
Two traps reduce the allowance sharply:
If you breach the allowance, the excess is added to your taxable income and taxed at your marginal rate via the annual allowance charge, effectively cancelling the relief.
Most people never get near £60,000, but the taper and the MPAA catch out high earners and those already drawing down. Check both before making a large contribution.
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