Taxation (UK) · Income from employment

Pension Contributions and Annual Allowance for ACCA TX-UK

Updated 11 October 2026 · Fact-checked

Contributions to a registered pension scheme get tax relief, and the annual allowance caps the tax-relieved total each tax year. It is £60,000 for 2023–24 to 2025–26, and it counts both employee and employer contributions. Unused allowance from the previous three years can be carried forward. Any excess is taxed at your marginal rates.

Understand Pension Contributions and Annual Allowance

A registered pension scheme gives tax relief on money going in. The relief works in two ways. The employee's own contributions get relief, and the employer's contributions are a business cost with no taxable benefit for the employee.

For the employee, relief depends on the scheme type. Under a net pay arrangement (most occupational schemes), the employer deducts the contribution from gross pay before PAYE. You get full relief at your marginal rate automatically. Under relief at source (personal pensions), you pay 80% of the gross contribution and the scheme claims 20% basic rate relief. If you pay higher or additional rate tax, you get the extra relief by extending your basic rate band by the gross contribution.

There is a limit on how much an individual can pay and still get relief. Your own gross contributions qualify up to the higher of your relevant earnings (broadly, taxable earnings) and £3,600. Employer contributions are not limited by your earnings. They are limited only by the annual allowance, and by the trade rules for the employer's deduction.

The annual allowance caps the total tax-relieved pension savings in a tax year. It counts employee and employer contributions together. It is £60,000 for 2023–24 to 2025–26, and £40,000 for 2022–23. Any excess is added to your income and taxed at your marginal rates as a tax charge. You can reduce the excess by using unused allowance from the previous three tax years, but only if you were a member of a registered scheme in those years.

High earners face tapering. The allowance falls by £1 for every £2 of adjusted income above £260,000, down to a minimum allowance of £10,000. The taper only applies if threshold income also exceeds its limit, which the exam question will normally make clear.

Key rules to remember

Annual allowance: £60,000 (2023–24 to 2025–26); £40,000 (2022–23); Counts gross employee and employer contributions together for the tax year.
Maximum individual contribution with relief: Higher of relevant earnings and £3,600 (gross); Employer contributions are not limited by your earnings.
Relief at source: gross contribution: Gross = Net paid × 100 ÷ 80; Basic rate relief of 20% is added by the scheme. Extend the basic rate band by the gross amount for higher rate relief.
Net pay arrangement: Taxable pay = Gross pay − employee contribution; Relief at your marginal rate through PAYE. The deduction does not reduce earnings for NIC.
Tapered annual allowance: £60,000 − ((Adjusted income − £260,000) ÷ 2), minimum £10,000; Applies only where the threshold income test is also failed. At adjusted income of £360,000 or more the minimum applies.
Carry forward: Unused allowance of the previous 3 tax years, earliest year first, after the current year allowance; You must have been a member of a registered scheme in each year you draw on.
Annual allowance charge: (Total pension input − allowance − unused allowance brought forward) × marginal rate; Excess is treated as the top slice of your income.
Employer contributions: Deductible trading expense; no taxable benefit; no NIC; Subject to the 'wholly and exclusively' rule for the employer's deduction.

How to solve Pension Contributions and Annual Allowance questions

Use this order for any pension question. It covers the relief, the allowance check and any charge.

1Identify who pays and the type of scheme: employer contribution, net pay arrangement or relief at source.
2Convert to gross. For relief at source, gross up the net payment by 100 ÷ 80.
3Check the limit for relief on the individual's own contributions: higher of relevant earnings and £3,600.
4Give the relief. Net pay: deduct from taxable pay. Relief at source: extend the basic rate band by the gross amount. Employer: deduct from trading profit.
5Add up total pension input for the tax year: employee gross plus employer contributions.
6Work out the annual allowance. Check whether tapering applies, using adjusted income above £260,000 and the minimum of £10,000.
7Use carry forward for the three previous years, earliest first, only where there was scheme membership.
8Tax any remaining excess at the individual's marginal rates. Show the figures clearly.

Quickest way: Three-line pension check

When to use it: Objective test questions asking for relief, the excess over the allowance or the tax charge.

Write the gross contribution first. Net ÷ 0.8 if relief at source.
Write: Input − allowance = excess. Then subtract carry forward, earliest year first.
Multiply what is left by the marginal rate. Check that the rate is the one the top slice falls in.

Common mistakes in Pension Contributions and Annual Allowance

Using the net payment as the gross contribution under relief at source.
The question gives the amount the person actually paid, and students stop there.
Fix: Gross up by 100 ÷ 80 first. The band extension and the allowance test both use the gross figure.
Counting only the employee's contributions in the annual allowance test.
Students focus on the personal relief side and forget the employer's payment.
Fix: Add employer and employee contributions together. Both count towards the allowance.
Limiting employer contributions by the employee's earnings.
The earnings limit for the employee's own relief is misapplied.
Fix: The earnings limit applies only to the individual's own contributions. Employer contributions are tested only against the annual allowance.
Using carry forward from the wrong years or in the wrong order.
Students use the latest year first or go back more than three years.
Fix: Use the current year's allowance first, then the earliest of the three previous years, then the next. Use the allowance that applied in each year: £40,000 for 2022–23.
Applying the taper without checking the allowance floor.
Students keep reducing the allowance by £1 per £2 of income with no limit.
Fix: The allowance cannot fall below the minimum of £10,000. Stop there.
Treating an employer contribution as a taxable benefit or subject to NIC.
Students confuse it with other benefits in kind.
Fix: An employer's contribution to a registered scheme is not a taxable benefit and no NIC arises. The employer gets a trading deduction.

Worked examples

Example 1

Priya has taxable income of £90,000 for 2025–26 before any pension relief, all from employment. She pays £24,000 into a personal pension under relief at source. Calculate the total tax relief she receives. Use a personal allowance of £12,570 and a basic rate band of £37,700, with rates of 20% and 40%.

Show the solution

Gross contribution = £24,000 × 100 ÷ 80 = £30,000. Her own contribution is within her earnings limit.
Basic rate relief given at source = £30,000 − £24,000 = £6,000.
Taxable income = £90,000 − £12,570 = £77,430.
Without extension: £37,700 × 20% = £7,540, and £39,730 × 40% = £15,892. Total £23,432.
With the basic rate band extended by £30,000 to £67,700: £67,700 × 20% = £13,540, and £9,730 × 40% = £3,892. Total £17,432.
Further higher rate relief = £23,432 − £17,432 = £6,000.
Total relief = £6,000 + £6,000 = £12,000.

Answer: Total relief is £12,000, which is 40% of the £30,000 gross contribution. Her net cost is £18,000 and her income tax liability is £17,432.

Example 2

Ravi has been a member of a registered pension scheme for many years. His total pension input is £95,000 in 2025–26. His inputs in earlier years were £25,000 in 2022–23, £50,000 in 2023–24 and £60,000 in 2024–25. His adjusted income is well below £260,000 and he is a higher rate taxpayer with other income making this the top slice. Calculate the annual allowance charge for 2025–26.

Show the solution

No taper applies, so the 2025–26 allowance is £60,000.
Excess = £95,000 − £60,000 = £35,000.
Unused allowance 2022–23 = £40,000 − £25,000 = £15,000.
Unused allowance 2023–24 = £60,000 − £50,000 = £10,000.
Unused allowance 2024–25 = £60,000 − £60,000 = nil.
Use the earliest year first: £15,000, then £10,000. Total carry forward used = £25,000.
Remaining excess = £35,000 − £25,000 = £10,000.
Charge = £10,000 × 40% = £4,000.

Answer: The annual allowance charge is £4,000, taxed at his higher rate as the top slice of income.

Exam tips

Write the allowance for each year next to the year before you start. The 2022–23 figure of £40,000 is a favourite trap in carry forward.
In objective test questions, check whether the question gives a net or a gross figure. This is the commonest source of wrong options.
In a written answer, show the gross contribution, the extended band and the marginal rates separately so you earn method marks.
Tapering questions usually state adjusted income. Apply £1 reduction per £2 over £260,000 and check the £10,000 floor.
Link to wider planning. A pension contribution can bring income below £100,000 and restore the personal allowance, so look for that in a longer question.

Practice questions from Income from employment

Pension Contributions and Annual Allowance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalPension Contributions and the Annual Allowance

Pension Contributions and Annual Allowance: frequently asked questions

What is the pension annual allowance for ACCA TX-UK?

It is £60,000 for 2023–24 to 2025–26, and £40,000 for 2022–23. It counts employee and employer contributions together. The minimum allowance after tapering is £10,000.

How does carry forward of the annual allowance work?

You first use the current year's allowance. Any excess is then covered by unused allowance from the previous three tax years, earliest year first. You must have been a member of a registered scheme in the year you draw on.

What is the difference between relief at source and a net pay arrangement?

Under relief at source you pay 80% of the gross contribution and the scheme adds basic rate relief. Higher rate relief comes from extending your basic rate band. Under a net pay arrangement the employer deducts the contribution from gross pay before tax, so relief is at your marginal rate automatically.

How is the annual allowance tapered for high earners?

The allowance falls by £1 for every £2 of adjusted income above £260,000. It cannot fall below the minimum allowance of £10,000. The taper also depends on a threshold income test, which the question will normally state.

Do employer pension contributions get tax relief?

Yes. The employer normally deducts the contribution as a trading expense. The employee has no taxable benefit and no NIC arises. The contribution still counts towards the employee's annual allowance.