Taxation (UK) · Property and investment income

Pension Contributions and Tax Relief Limits for ACCA Taxation (UK)

Updated 11 October 2026 · Fact-checked

Relief depends on the type of contribution. Personal contributions to a registered scheme get relief up to the higher of relevant earnings and £3,600 gross. The £3,600 applies when you have little or no earnings. The annual allowance, £60,000 for 2025–26, limits pension saving. Excess creates an annual allowance charge. Unused allowance can be carried forward.

Understand Pension Contributions and Tax Relief Limits

A registered pension scheme gives tax relief to encourage saving for retirement. You must separate two ideas that students often mix up: the relief limit and the annual allowance.

Relevant earnings decide how much of your own personal contribution gets tax relief. Relevant earnings are broadly employment income, trading profits and similar earned income. Investment income such as rent, interest and dividends is not relevant earnings. The maximum contribution which can qualify for tax relief without any earnings is £3,600 gross. So when relevant earnings are lower than £3,600, a gross contribution of up to £3,600 can still qualify.

The annual allowance is a separate limit on total pension saving in a tax year. It is £60,000 for 2023–24 to 2025–26. It counts all contributions, including the employer's, not just yours. If total contributions exceed the allowance, the excess is taxed as an annual allowance charge. The excess is treated as the top slice of your income, so it is taxed at the rates of the bands in which that slice falls.

A personal contribution to a personal pension is paid net of basic rate tax (20%). The scheme claims the basic rate relief from HMRC. So you pay in 80% of the gross amount. Higher and additional rate taxpayers get extra relief by extending their basic rate band and higher rate band by the gross contribution. This is a tax computation step, not a deduction from income.

The annual allowance is tapered for very high earners. The taper applies to adjusted income above the income limit of £260,000. The allowance is reduced by £1 for every £2 of adjusted income above that limit, down to a minimum allowance of £10,000. Unused annual allowance from the previous three tax years can be carried forward, using the earliest year first, but only if you were a member of a registered scheme in that year. The current year's allowance is used first.

Key rules to remember

Annual allowance (2023–24 to 2025–26): Annual allowance = £60,000; Covers personal and employer contributions together. Minimum allowance after tapering is £10,000. The income limit for the taper is £260,000 of adjusted income.
Maximum relievable personal contribution: Higher of relevant earnings and £3,600 (gross); Work with the gross figure. £3,600 gross is the maximum which can qualify for relief without any earnings, so it applies when relevant earnings are lower.
Gross from net contribution: Gross = Net paid × 100 ÷ 80; A personal pension contribution is paid net of 20% basic rate tax. The scheme claims the 20% from HMRC.
Band extension: Basic rate limit = £37,700 + gross personal contribution; higher rate limit = £125,140 + gross personal contribution; Both the basic rate limit and the higher rate limit (£125,140 of taxable income) are extended by the gross personal contribution. So higher rate relief is given at 40% and additional rate relief at 45% on the gross amount.
Annual allowance charge: (Total contributions − available allowance) taxed as the top slice of income; Available allowance is the current year's £60,000 (or tapered amount) plus unused amounts from the previous three years, earliest first. Add the excess on top of taxable income and tax it at the rates of the bands (extended where relevant) in which it falls.
Cap on income tax reliefs: Cap = higher of £50,000 and 25% of income; Applies to certain reliefs unless otherwise restricted. Pension contributions are not subject to this cap; they are limited by the annual allowance instead.

How to solve Pension Contributions and Tax Relief Limits questions

Use this method for any pension question. Work out the relief first, then test the allowance.

1Identify the type of contribution: employer, personal to a personal pension (paid net), or through payroll (net pay arrangement, paid gross).
2Find the individual's relevant earnings for the tax year and check the personal contribution does not exceed the higher of relevant earnings and £3,600.
3Gross up any net personal contribution by multiplying by 100 ÷ 80.
4Do the income tax computation. Pension scheme contributions are not deducted from income. Instead, extend the basic rate band (and the higher rate band where it matters) by the gross personal contribution.
5Add up all contributions in the year, including the employer's, and compare with the annual allowance. Taper it if income is above the income limit.
6If the total exceeds the allowance, use unused allowance from the previous three years, earliest first, where the individual was a scheme member.
7Tax any remaining excess as an annual allowance charge at the individual's marginal rates, treated as the top slice of income.
8State the cap on reliefs separately if other reliefs such as trading loss relief or interest relief are claimed.

Quickest way: Two-test shortcut: relief test then allowance test

When to use it: Use for objective test questions asking whether a contribution qualifies for relief or whether a charge arises.

Write down the gross contribution first.
Test 1: is the personal contribution within the higher of relevant earnings and £3,600? If not, relief is limited.
Test 2: add employer and personal gross amounts and compare with £60,000 plus any unused carry forward.
If under both, no charge arises. Then extend the bands by the gross personal contribution.
If over, charge the excess at the marginal rate.

Common mistakes in Pension Contributions and Tax Relief Limits

Deducting the pension contribution from income
Students treat it like a donation or a trading expense.
Fix: For a personal pension, extend the basic rate band by the gross contribution. Do not reduce taxable income.
Using the net amount paid as the contribution
The question often gives the cash paid, not the gross figure.
Fix: Multiply a net personal contribution by 100 ÷ 80 before extending bands or testing against limits.
Ignoring the employer's contribution in the annual allowance test
Students think the allowance only covers their own payments.
Fix: Include all contributions by or for the individual to registered schemes.
Counting investment income as relevant earnings
Students see total income and assume it all counts.
Fix: Relevant earnings are employment income, trading profits and similar earned income. Exclude rent, interest and dividends.
Using the earliest unused year last when carrying forward
Students pick the most recent year because it feels natural.
Fix: Use the current year's allowance first, then the earliest of the three previous years, then the next.
Applying the cap on income tax reliefs to pension contributions
Both topics are about limiting reliefs and appear together in the syllabus.
Fix: Keep them separate. Pensions are limited by relevant earnings and the annual allowance. The £50,000 or 25% cap applies to other reliefs.

Worked examples

Example 1

Priya is self-employed with trading profits of £90,000 for 2025–26 and no other income. She pays £24,000 into a personal pension (net of basic rate relief). Calculate her income tax liability for 2025–26 and state whether an annual allowance charge arises. Ignore National Insurance.

Show the solution

Gross contribution = £24,000 × 100 ÷ 80 = £30,000. This is below her relevant earnings of £90,000, so it qualifies for relief.
Personal allowance: income is £90,000, below £100,000, so the full £12,570 applies. Taxable income = £90,000 − £12,570 = £77,430.
Extended basic rate band = £37,700 + £30,000 = £67,700.
Tax: £67,700 × 20% = £13,540.
Tax: (£77,430 − £67,700) = £9,730 × 40% = £3,892.
Income tax liability = £13,540 + £3,892 = £17,432.
Annual allowance test: gross contribution £30,000 is below £60,000, so no charge arises.

Answer: Income tax liability is £17,432. No annual allowance charge arises.

Example 2

Tom is an employee earning £80,000 in 2025–26. His employer pays £50,000 into his pension and he pays a gross £25,000 personally. He has no unused allowance from earlier years. Compute the excess over the annual allowance and the annual allowance charge.

Show the solution

Total contributions = £50,000 + £25,000 = £75,000.
Check Tom's personal contribution is within relief limit: £25,000 is below his relevant earnings of £80,000.
Annual allowance for 2025–26 = £60,000. His income is below the £260,000 income limit, so no tapering applies.
No unused allowance is available to carry forward.
Excess = £75,000 − £60,000 = £15,000.
Taxable income = £80,000 − £12,570 = £67,430. His basic rate band is extended by the gross personal contribution: £37,700 + £25,000 = £62,700.
His taxable income of £67,430 already exceeds the extended basic rate limit of £62,700, so he is a higher rate taxpayer before the excess is added.
The excess is taxed as the top slice of his income, from £67,430 to £82,430. This is above £62,700 and below the extended higher rate limit of £150,140 (£125,140 + £25,000), so the whole £15,000 falls in the higher rate band and is taxed at 40%.
Annual allowance charge = £15,000 × 40% = £6,000.

Answer: The excess over the annual allowance is £15,000. The annual allowance charge is £6,000 (£15,000 × 40%).

Exam tips

Always write the gross figure on the first line. Examiners award marks for the grossing up, even if later steps go wrong.
In objective tests, read whether a contribution is stated net or gross before choosing an answer. The wrong basis is a common distractor.
Keep a line in your answer for the annual allowance test, even when no charge arises. Say so clearly.
The tax rates and allowances are provided in the exam. Learn how to use them rather than memorise numbers, but know that £3,600 gross is the maximum that can qualify for relief when you have no earnings or relevant earnings are lower.
In constructed response questions, show band extension as a separate working so you can earn follow-through marks.
When an annual allowance charge arises, add the excess on top of taxable income and show which band it falls in, using the extended bands.

Practice questions from Property and investment income

Pension Contributions and Tax Relief Limits in other exams

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

Pension Contributions and Tax Relief Limits: frequently asked questions

What is the pension annual allowance for TX-UK?

It is £60,000 for the tax years 2023–24 to 2025–26. The minimum allowance after tapering is £10,000, and the income limit is £260,000. It covers all contributions, including the employer's.

What is the difference between relevant earnings and the annual allowance?

Relevant earnings limit how much of your own personal contribution gets tax relief. The annual allowance limits total pension saving in the year, from all sources. You must pass both tests to avoid losing relief or paying a charge.

Can you carry forward unused pension allowance?

Yes. Unused allowance from the previous three tax years can be carried forward if you were a member of a registered scheme in those years. You use the current year first, then the earliest of the earlier years.

Does the cap on income tax reliefs apply to pension contributions?

No. The cap is the higher of £50,000 or 25% of income and applies to certain other reliefs. Pension contributions are controlled by relevant earnings and the annual allowance.

How much can you contribute with no earnings?

The maximum contribution which can qualify for tax relief without any earnings is £3,600 gross. This is the figure you use when relevant earnings are lower.