Taxation (UK) · The use of exemptions and reliefs in deferring and minimising income tax liabilities

Pension Contributions and the Annual Allowance in TX-UK

Updated 11 October 2026 · Fact-checked

Pension contributions to registered schemes get income tax relief, but the total paid in by you and your employer each year is tested against the annual allowance, £60,000 for 2025–26. Unused allowance from the previous three years can be carried forward. Any excess is taxed as extra income at your marginal rate.

Understand Pension Contributions and Annual Allowance

A registered pension scheme lets you save for retirement with tax help. You get income tax relief on what you pay in. The money grows inside the scheme without UK tax on its income and gains.

There are two separate limits, and students often mix them up. The first limit is on tax relief for your own contributions. You get relief on gross personal contributions up to 100% of your relevant earnings for the year. If you have no earnings, or low earnings, you can still get relief on gross contributions of up to £3,600.

The second limit is the annual allowance. It is a cap on the total pension saving in a year, made up of your own gross contributions plus your employer's contributions. For 2023–24 to 2025–26 it is £60,000. If the total goes above your allowance, you pay an annual allowance charge on the excess. The charge is added to your income and taxed at your marginal rates.

Two things can change your allowance. Tapering cuts it for very high earners, down to a minimum of £10,000. Carry forward lets you use unused allowance from the previous three tax years, but only if you were a member of a registered scheme in those years.

Employer contributions are handled differently from personal ones. They are not a taxable benefit for the employee and no NIC is due on them. The employer normally gets a deduction when computing trading profits, as long as the payment is wholly and exclusively for the trade. They still count towards your annual allowance.

Key rules to remember

Annual allowance: 2023–24 to 2025–26: £60,000 (2022–23: £40,000); Tested against your gross personal contributions plus employer contributions for the tax year.
Tapered annual allowance: Allowance = £60,000 − ((adjusted income − £260,000) ÷ 2), minimum £10,000; Applies only where adjusted income is above the £260,000 income limit. Adjusted income includes employer pension contributions. Example: £300,000 gives a reduction of £20,000 and an allowance of £40,000.
Maximum relief without earnings: £3,600 gross; Equals £2,880 paid net of 20% basic rate relief.
Relief limit with earnings: Gross personal contributions qualifying for relief ≤ relevant earnings; Employer contributions are not limited by your earnings for relief purposes. They only face the annual allowance and the wholly and exclusively test for the employer.
Net to gross: Gross contribution = net payment ÷ 80%; Personal contributions to a personal pension are paid net of 20% basic rate relief. Example: £16,000 net = £20,000 gross.
Higher and additional rate relief: Extend the basic rate band and higher rate threshold by the gross contribution; This gives extra relief at 20% (or 25% for additional rate) on the gross amount. Basic rate relief is already given at source.
Carry forward: Available allowance = current year allowance + unused allowance of the previous 3 tax years; Use the current year's allowance first, then the earliest of the three years. You must have been a scheme member in each year you carry forward from.
Annual allowance charge: Excess over available allowance × your marginal rate; The excess is treated as the top slice of your income.

How to solve Pension Contributions and Annual Allowance questions

Use this order for any pension question. It separates tax relief from the annual allowance check, which is where marks are lost.

1Identify the type of contribution. Is it personal (net to a personal pension), paid by the employer, or deducted from pay under an occupational scheme?
2Convert any net personal payment to gross by dividing by 80%.
3Check the relief limit: gross personal contributions that qualify cannot exceed relevant earnings, or £3,600 if that is higher for a person with low or no earnings.
4Compute income tax. For a personal pension, extend the basic rate band (and higher rate threshold) by the gross contribution. For a payroll deduction under an occupational scheme, deduct the contribution from earnings instead.
5Work out total pension input for the annual allowance: gross personal contributions plus employer contributions.
6Find the allowance. Taper it if adjusted income exceeds £260,000, with a floor of £10,000.
7If input is above the allowance, deduct unused allowance from the three previous years, earliest year first, after using the current year's allowance.
8Tax any remaining excess as additional income at the marginal rate, and state the final tax figure.

Quickest way: Gross-up, compare, carry forward

When to use it: Use this in Section A and OT case questions where you have about three minutes and only need a tax saving or a charge.

Gross up any net personal payment by ÷ 0.8.
Tax saving from a higher rate taxpayer's personal contribution beyond basic rate relief = gross × 20%, if the contribution falls in the higher rate band.
Add gross personal contributions and employer contributions. Compare to £60,000.
If there is an excess, subtract earlier unused allowances oldest first. Only what remains is charged.
Multiply any remaining excess by the marginal rate, usually 40% or 45%.

Common mistakes in Pension Contributions and Annual Allowance

Treating the net payment as the amount tested against the annual allowance.
The cheque the person writes is the net figure, so it looks like the contribution.
Fix: Always gross up by ÷ 80% for personal pension payments before testing the annual allowance or extending bands.
Leaving out employer contributions when testing the annual allowance.
Employer contributions are not on the employee's income tax computation, so they are forgotten.
Fix: Total pension input is personal gross plus employer. Write both numbers on one line.
Using the earliest carry forward year before the current year's allowance.
Students assume the oldest year must be used first of all.
Fix: Use the current year's allowance in full first. Only then use unused amounts from the previous three years, earliest first.
Using the wrong annual allowance for an old year in carry forward.
Students apply £60,000 to every year.
Fix: Use the allowance for that year: £40,000 for 2022–23 and £60,000 for 2023–24 to 2025–26, as ACCA gives them.
Adding the pension contribution to taxable income as a deduction in the personal pension case.
Students confuse it with an occupational scheme paid from gross pay.
Fix: For personal pensions, leave income unchanged and extend the basic rate band by the gross payment. Only payroll-deducted contributions reduce taxable earnings.
Forgetting that employer contributions give no taxable benefit or NIC for the employee.
Students treat the payment like a cash bonus.
Fix: State clearly that employer contributions are exempt for the employee and are normally deductible for the employer, which makes them more tax-efficient than extra salary.

Worked examples

Example 1

Maya has employment income of £80,000 in 2025–26 and no other income. She pays £16,000 into a personal pension (net of basic rate relief). Compute her income tax liability and the tax saved by the contribution. Use a personal allowance of £12,570, a basic rate band of £37,700, basic rate 20% and higher rate 40%.

Show the solution

Gross the payment up: £16,000 ÷ 80% = £20,000 gross. The scheme claims £4,000 basic rate relief from HMRC.
Taxable income: £80,000 − £12,570 = £67,430.
Extend the basic rate band: £37,700 + £20,000 = £57,700.
Tax at 20%: £57,700 × 20% = £11,540.
Tax at 40%: (£67,430 − £57,700) = £9,730 × 40% = £3,892.
Income tax liability = £11,540 + £3,892 = £15,432.
Without the contribution: £37,700 × 20% = £7,540 and £29,730 × 40% = £11,892, giving £19,432.
Tax saved = £19,432 − £15,432 = £4,000, which is the extra 20% on £20,000 gross.

Answer: Maya's income tax liability is £15,432. The contribution saves her £4,000 of tax through the extended band, on top of the £4,000 basic rate relief already given at source, so total relief is £8,000 on a £20,000 gross contribution.

Example 2

Raj is employed in 2025–26 on earnings of £100,000. His employer pays £120,000 into his registered pension scheme in that year. Raj has been a scheme member for many years. His pension input and the annual allowances for earlier years were: 2022–23 input £25,000 (allowance £40,000); 2023–24 input £30,000 (allowance £60,000); 2024–25 input £55,000 (allowance £60,000). Assume no tapering and that Raj is a higher rate taxpayer. Calculate any annual allowance charge.

Show the solution

Pension input for 2025–26 = £120,000 (employer contribution only).
Annual allowance for 2025–26 = £60,000. Excess = £120,000 − £60,000 = £60,000.
Unused allowance 2022–23: £40,000 − £25,000 = £15,000.
Unused allowance 2023–24: £60,000 − £30,000 = £30,000.
Unused allowance 2024–25: £60,000 − £55,000 = £5,000.
Total available carry forward = £15,000 + £30,000 + £5,000 = £50,000.
Use earliest first, but the whole excess needs more than the total: all £50,000 is used. Remaining excess = £60,000 − £50,000 = £10,000.
Charge = £10,000 × 40% = £4,000 (ignoring any effect on the personal allowance).

Answer: Raj has an annual allowance charge on £10,000 of excess, which is £4,000 at 40%. The employer contribution gives no taxable benefit or NIC for Raj, but it uses up his annual allowance.

Exam tips

Write the allowance for each year next to the year label. The numbers are in the ACCA tax tables, so there is no excuse for using the wrong one.
In OT questions, read whether the figure is net or gross before doing anything else. This is a very common trap.
Keep relief and allowance as two separate workings: relief affects the income tax computation, the allowance only decides whether there is a charge.
For employer contributions, say three things: no taxable benefit, no NIC, and deductible for the employer if wholly and exclusively for trade purposes.
Show the carry forward table with year, allowance, input and unused figure. Even if your final number is wrong, you collect method marks.

Practice questions from The use of exemptions and reliefs in deferring and minimising income tax liabilities

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 annual allowance for ACCA TX-UK?

For 2023–24 to 2025–26 it is £60,000, and for 2022–23 it is £40,000. The minimum allowance is £10,000 and the income limit for tapering is £260,000. These figures are in the tax tables ACCA provides.

How does carry forward of unused annual allowance work?

If your pension input exceeds the current year's allowance, you can use unused allowance from the previous three tax years. Use the current year first, then the earliest of the three years. You must have been a member of a registered scheme in each year you carry forward from.

How is tax relief given on personal pension contributions?

A personal pension payment is made net of 20% basic rate relief, so you gross it up by dividing by 80%. Higher and additional rate relief is given by extending the basic rate band and higher rate threshold by the gross contribution. Contributions through payroll under an occupational scheme are deducted from earnings instead.

Is it better to take employer pension contributions than extra salary?

Often yes for tax. An employer contribution is not a taxable benefit and does not attract employee or employer NIC. It is normally deductible for the employer. It must still fit within the annual allowance.

What happens if I have no earnings but want to pay into a pension?

You can still get tax relief on gross contributions of up to £3,600 a year. That is a net payment of £2,880 after basic rate relief.