Pensions and Tax Relief / Lesson 3 of 8
The annual allowance
Two separate caps, and the one that binds you is usually not the one you have heard of.
The short answer
- ✓ Relief is limited to the lower of the annual allowance and 100% of your earnings
- ✓ Employer and third party contributions count towards the same allowance
- ✓ Defined benefit schemes are measured on benefit growth, not cash paid in
- ✓ Exceeding it creates a tax charge rather than blocking the contribution
Two limits, both apply
| Limit | Amount |
|---|---|
| Annual allowance | £60,000 |
| Your relevant UK earnings | 100% of them |
You get relief on the lower of the two. For most people the earnings limit binds long before the annual allowance does: someone earning £35,000 cannot get relief on a £40,000 contribution, however much annual allowance is technically available.
What counts towards it
The annual allowance measures everything going in, not just your own money.
Your own contributions, gross
Employer contributions
Any third party contributions
For defined benefit schemes: the increase in
the value of your promised benefits
All of it counts against £60,000.Employer contributions catch people out. Someone contributing modestly themselves can still be near the limit because of what their employer puts in alongside.
The non-earner rule
Someone with no earnings at all can still contribute a small amount each year and receive basic rate relief on it. This is what allows contributions for a non-working spouse or a child, and it is the one case where relief exceeds the earnings limit.
Exceeding the allowance
Nothing blocks the contribution. Instead an annual allowance charge is added to your tax bill, effectively removing the relief on the excess. You declare it on your tax return, and where the charge is large the scheme can sometimes pay it on your behalf from your pot.
The bit HMRC does not spell out
Defined benefit members are measured on the growth in their promised pension, not on contributions, and that growth can be far larger than any cash figure suggests. A significant promotion in a final salary scheme can revalue years of accrued benefit at once and produce an annual allowance charge from a single pay rise.
Public sector staff receiving a large promotion are the classic case. It is entirely counter-intuitive, because they never chose to contribute more.
Common mistakes
- Forgetting employer contributions count. They fill the same allowance.
- Ignoring the earnings limit. For most people it binds first.
- Assuming a defined benefit scheme cannot breach it. Benefit growth is what counts.
- Thinking the excess is refused. It is charged, not blocked.
Try it on your own numbers
This is the same calculator as the full tool page, using 2026/27 rates.
Your pension contributions
Check this year's contributions against your £ annual allowance, including taper and carry forward.
You + employer + tax relief (the full gross amount / pension input amount).
The allowance tapers down once adjusted income tops £ - but only if threshold income is also above £.
Taxable income + all pension contributions (incl. employer).
Roughly your taxable income excluding employer contributions.
Unused allowance from the last 3 tax years can be added on top - if you were a pension scheme member in those years.
Used only to estimate the annual allowance charge on any excess.
You may face an annual allowance charge. You can still contribute this much before a charge applies.
- Standard annual allowance
- Taper reduction
- Carry forward added
- Available allowance
- Contributed this year
Estimated annual allowance charge
Room to contribute
headroom left
of allowance used
Estimate only. The annual allowance charge is added to your income and taxed at your marginal rate(s). Check with a regulated adviser.
Allowance by year
Carry forward uses the oldest unused allowance first. Bars show each year's allowance; the line marks this year's contribution against your total available pot.
Compare saved scenarios
| Scenario | Available | Contributed | Excess / charge | |
|---|---|---|---|---|
Key takeaways
- ✓ Relief is limited to the lower of the annual allowance and 100% of your earnings
- ✓ Employer and third party contributions count towards the same allowance
- ✓ Defined benefit schemes are measured on benefit growth, not cash paid in
- ✓ Exceeding it creates a tax charge rather than blocking the contribution
Check you have got it
3 quick questions. No score is kept, and you can change your mind.
1. You earn £35,000 and want relief on a £40,000 contribution. What happens?
2. Do employer contributions count towards your annual allowance?
3. How is a defined benefit scheme measured against the annual allowance?
Sources
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