Advanced Taxation (UK) · Income tax: income from employment

Pension Contributions and the Annual Allowance for ACCA ATX

Updated 11 October 2026 · Fact-checked

Contributions to a registered pension scheme get tax relief, but total pension input in a tax year is tested against the annual allowance (£60,000 for 2023/24 to 2025/26). Tapering can cut the allowance for high earners to as low as £10,000. Unused allowance from the previous three years can be carried forward. Any excess is taxed as income.

Understand Pension Contributions and the Annual Allowance

A registered pension scheme gives tax relief on money going in. Three things matter: who pays, how relief is given, and whether the total paid in is too large for the year.

Employer contributions are normally a deductible expense for the employer. They are not a taxable benefit for the employee and carry no national insurance. This is why employers and employees often prefer them to extra salary.

Personal contributions get relief in one of two ways. Under relief at source, you pay net of basic rate tax (20%) and the scheme claims the basic rate relief. Higher or additional rate relief is given by extending your basic rate band by the gross contribution. Under a net pay arrangement, the contribution comes out of pay before income tax, so relief is given at your marginal rate through payroll. National insurance is not reduced. The limit on personal contributions qualifying for relief is the higher of your relevant earnings and £3,600 gross. £3,600 is the maximum with no earnings.

The annual allowance limits how much can build up tax-efficiently. It is £60,000 for 2023/24 to 2025/26 (£40,000 for 2022/23). For a money purchase scheme, pension input is the total of the employer contributions plus the gross personal contributions in the tax year. If input is more than the allowance, the excess is the annual allowance charge. It is added to your other income and taxed at your marginal rates.

Tapering applies to high earners. It only bites if threshold income is over £200,000 and adjusted income is over £260,000. The allowance falls by £1 for every £2 of adjusted income over £260,000, 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. The current year's allowance is used first, then the earliest of the three years.

The cap on income tax reliefs (the higher of £50,000 or 25% of income) is a separate rule. It does not restrict pension contributions.

Key rules to remember

Annual allowance: 2023/24 to 2025/26: £60,000; 2022/23: £40,000; minimum allowance £10,000; Check the tax year in the question. Carry forward often uses 2022/23, which is £40,000.
Pension input (money purchase): Employer contributions + gross personal contributions paid in the tax year; Gross up relief-at-source contributions: net ÷ 0.80. Net pay contributions are already gross.
Taper conditions: Threshold income > £200,000 AND adjusted income > £260,000; If threshold income is £200,000 or less, there is no taper, however high adjusted income is.
Tapered annual allowance: £60,000 − (Adjusted income − £260,000) ÷ 2, minimum £10,000; The minimum is reached when adjusted income is £360,000 or more.
Adjusted income (approach): Net income before personal pension relief at source + employer contributions (and net pay contributions if deducted); It captures all pension input, so employer contributions raise adjusted income. Threshold income leaves out employer contributions.
Carry forward: Unused allowance of the previous 3 tax years, earliest first, after the current year's allowance; You must have been a scheme member in the year the allowance arose.
Annual allowance charge: (Pension input − allowance − carry forward used) × marginal rate; The excess is added to income and taxed at the rates that apply on top of your other income.
Personal contribution relief limit: Higher of relevant earnings and £3,600 (gross); Employer contributions are not restricted by the personal earnings limit.
Cap on income tax reliefs: Higher of £50,000 or 25% of income; Does not apply to pension contributions.

How to solve Pension Contributions and the Annual Allowance questions

Use this order for any pension question. It stops you missing the taper or the carry forward.

1Identify the tax year and the annual allowance for it. Note the years needed for carry forward.
2Work out pension input: employer contributions plus gross personal contributions. Gross up relief-at-source payments by dividing by 0.80.
3Check the relief limit for personal contributions: relevant earnings or £3,600 if higher. Restrict relief if the payment is above it.
4Test for tapering. Find threshold income and adjusted income. If both limits are exceeded, reduce the allowance by £1 for each £2 over £260,000, subject to a £10,000 floor.
5Compare input with the allowance. If input is lower, there is no charge and any unused amount is available for carry forward.
6If input is higher, apply carry forward from the earliest of the previous three years first. Keep track of what remains.
7Charge any remaining excess at your marginal rate. Add it to income and work out the extra tax.
8Show the effect on the computation: extended basic rate band for relief at source, or lower taxable pay for net pay. State the conclusion and advice.

Quickest way: Three-line pension check

When to use it: Use when the question asks 'is there an annual allowance charge?' and you are short of time.

Total input = employer + gross personal. Compare it with £60,000 (or the tapered figure).
Only taper if income is over £200,000 threshold and £260,000 adjusted. Then allowance = £60,000 − half of the excess over £260,000.
If there is an excess, list the three previous years' unused amounts, take the earliest first, and tax any leftover at 45%, 40% or 20% depending on where it falls.

Common mistakes in Pension Contributions and the Annual Allowance

Using the net personal payment as pension input.
The question gives the amount paid out of the bank account, which is net of basic rate relief.
Fix: Divide by 0.80 for relief at source. Use the gross figure for both the limit and pension input.
Applying the taper whenever income is over £260,000.
Students forget there are two tests.
Fix: Check threshold income over £200,000 first. Only then use adjusted income over £260,000.
Leaving employer contributions out of adjusted income.
They are not taxed on the employee, so they are ignored.
Fix: Add them to adjusted income. Leave them out of threshold income.
Using carry forward in the wrong order.
Students start with the latest year, or forget the current year's allowance comes first.
Fix: Use the current year's allowance in full, then the earliest of the three prior years, then the next.
Using the £60,000 allowance for 2022/23 in carry forward.
The allowance is memorised as one figure.
Fix: Use £40,000 for 2022/23 and £60,000 for 2023/24 to 2025/26, as given in the tax tables.
Applying the cap on income tax reliefs to pension contributions.
The cap is listed with other reliefs in the tables.
Fix: Pension relief is outside the cap. Use the annual allowance and the earnings limit instead.

Worked examples

Example 1

Anil is a member of a registered pension scheme. In 2025/26 his employer contributes £40,000 and he pays gross personal contributions of £35,000 (his earnings are £70,000). His pension input in earlier years was: 2022/23 £30,000, 2023/24 £50,000, 2024/25 £55,000. Is there an annual allowance charge for 2025/26?

Show the solution

Input for 2025/26 = £40,000 + £35,000 = £75,000. Income is below the taper limits, so the allowance is £60,000.
Personal contributions of £35,000 are below earnings of £70,000, so full relief is available.
Excess over the allowance = £75,000 − £60,000 = £15,000.
Unused allowance: 2022/23 £40,000 − £30,000 = £10,000; 2023/24 £60,000 − £50,000 = £10,000; 2024/25 £60,000 − £55,000 = £5,000.
Carry forward earliest first: 2022/23 £10,000, then 2023/24 £5,000. That covers the £15,000 excess.
No charge arises. Remaining unused: £5,000 from 2023/24 and £5,000 from 2024/25.

Answer: No annual allowance charge. The £15,000 excess is covered by carry forward from 2022/23 (£10,000) and 2023/24 (£5,000).

Example 2

Beth earns a salary of £250,000 in 2025/26 and has no other income. Her employer pays £60,000 into her registered scheme. She has no unused allowance from earlier years. Calculate any annual allowance charge. Then show the effect if £10,000 of unused allowance were available.

Show the solution

Pension input = £60,000 (employer contribution only).
Threshold income = £250,000, which is over £200,000. Adjusted income = £250,000 + £60,000 = £310,000, which is over £260,000. So the taper applies.
Reduction = (£310,000 − £260,000) ÷ 2 = £25,000. Tapered allowance = £60,000 − £25,000 = £35,000. This is above the £10,000 minimum.
Excess = £60,000 − £35,000 = £25,000. With no carry forward, this is taxable.
Her income is above £125,140, so the excess is taxed at 45%. Charge = £25,000 × 45% = £11,250.
With £10,000 carried forward the excess is £15,000. Charge = £15,000 × 45% = £6,750.

Answer: The tapered allowance is £35,000 and the annual allowance charge is £11,250. With £10,000 of carry forward the charge falls to £6,750.

Exam tips

Always show the allowance for each year in a carry forward table. Marks go for the right figures even if one input is wrong.
Write out both taper tests. A clear statement of threshold income and adjusted income earns marks even when the figures differ from the model answer.
Say whether contributions are net pay or relief at source. The treatment of the basic rate band and NIC differs.
In planning questions, compare employer contributions, salary sacrifice and personal contributions. Mention NIC savings and the annual allowance risk.
State clearly that the cap on income tax reliefs does not restrict pension relief. Then use your time on the allowance.

Practice questions from Income tax: income from employment

Pension Contributions and the 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 Applied SkillsPension Contributions and Annual Allowance

Pension Contributions and the Annual Allowance: frequently asked questions

How does an employer pension contribution get tax relief?

The employer deducts it when calculating its taxable profits. The employee has no taxable benefit and no NIC is due. It does count towards pension input for the annual allowance.

How does carry forward of the annual allowance work?

You can use unused allowance from the previous three tax years. You must have been a member of a registered scheme in those years. The current year's allowance is used first, then the earliest of the three years.

How is the tapered annual allowance calculated?

It applies only if threshold income exceeds £200,000 and adjusted income exceeds £260,000. The £60,000 allowance falls by £1 for every £2 of adjusted income above £260,000. It cannot go below £10,000.

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 covers other reliefs. Pension contributions are limited by the annual allowance and the earnings limit for personal contributions.