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Pension Contributions

Understanding the rules around pension contributions is essential for maximising tax-efficient retirement saving in the UK. The total amount you can contribute to your pension each year and still receive tax relief is subject to several limits and tests. The most important is the annual allowance, which for the 2025/26 tax year is £60,000. However, this figure is reduced for high earners under the tapering rules, and different limits apply once you have started drawing benefits. Getting the timing and amount of contributions right can save you thousands in tax.

Annual Allowance

The annual allowance is the total amount that can be paid into all your defined contribution pensions (including your contributions, your employer's contributions, and any tax relief added) in a tax year without triggering an annual allowance charge. For 2025/26, the standard annual allowance is £60,000. This applies to the total of all contributions across all your pension schemes. If you exceed the annual allowance, you pay an annual allowance charge through your Self Assessment at your marginal rate of Income Tax. The charge effectively claws back the tax relief you received on the excess contributions. Note that the annual allowance also applies to defined benefit pensions, where the value of the benefits accrued is measured by a 16:1 valuation factor on the annual pension increase.

Tapering of the Annual Allowance

If your adjusted income (total income including employer pension contributions) exceeds £260,000, your annual allowance starts to be tapered. For every £2 of adjusted income above £260,000, your annual allowance reduces by £1, down to a minimum of £10,000. This means high earners can find their annual allowance severely restricted. The tapering applies if your threshold income (broadly your net income excluding pension contributions) exceeds £200,000. If your threshold income is below £200,000, the taper does not apply regardless of your adjusted income. The tapered allowance can catch out senior executives and company directors who receive large employer pension contributions, so careful planning is essential.

Money Purchase Annual Allowance

Once you start taking flexible benefits from a defined contribution pension — such as entering flexi-access drawdown or taking an UFPLS payment — the money purchase annual allowance (MPAA) kicks in. For 2025/26, the MPAA is £10,000. This significantly limits the amount you can pay into defined contribution pensions with tax relief after you have accessed your pension flexibly. The MPAA does not apply if you only take your tax-free lump sum without drawing any taxable income. It also does not apply to defined benefit schemes. The MPAA is a trap for people who return to work after starting to draw their pension and want to resume saving.

Carry Forward

You can carry forward unused annual allowance from up to three previous tax years, allowing you to make larger contributions in the current year. To use carry forward, you must have been a member of a registered pension scheme (any scheme, even one with no contributions) in each of the years you want to carry forward from. You use the current year's annual allowance first, then the earliest of the three previous years. Unused allowance is calculated as the annual allowance for that year minus the total contributions made. The standard annual allowance for carry forward purposes is the current year's allowance, but if you are subject to tapering in the current year, the tapered allowance applies to the whole amount.

Net Pay vs Relief at Source

There are two main methods for giving tax relief on pension contributions. Under the net pay arrangement (used by most workplace schemes), contributions are taken from your gross pay before Income Tax is calculated. This means you automatically receive full tax relief at your marginal rate, and higher-rate taxpayers do not need to claim anything extra. Under relief at source (used by most personal pensions and SIPPs), you pay net of basic-rate tax and the provider claims the 20% from HMRC. Higher-rate and additional-rate taxpayers must claim the extra relief through their Self Assessment tax return. Which method applies depends on your scheme, and if you have both types, you need to be careful with the total contribution limits.

The Recycling Rule

The recycling rule is an anti-avoidance provision that applies if you take a pension commencement lump sum (PCLS) and use it to make further pension contributions that are more than 30% higher than your normal regular contributions. If the PCLS exceeds £27,500 and you recycle it into contributions on which you receive tax relief, HMRC can impose a tax charge of up to 70% on the recycled amount. This is a complex area and usually only affects very large lump sums, but it is important to be aware of if you are planning a significant contribution after taking tax-free cash.