Advanced Taxation (UK) · Income tax: the use of exemptions and reliefs in deferring and minimising income tax liabilities

Pension Contributions and the Annual Allowance in ATX-UK

Updated 11 October 2026 · Fact-checked

Registered pension contributions get income tax relief up to the higher of £3,600 and your relevant earnings. The annual allowance (£60,000 for 2025/26) caps tax-efficient pension input. High earners face tapering to a £10,000 minimum. Unused allowance from the previous three years can be carried forward. Any excess is taxed as income.

Understand Pension Contributions and Annual Allowance

A registered pension scheme lets you save for retirement with tax help. You get income tax relief on the money going in. The fund grows free of tax. The government limits how much can go in each year with tax advantages. That limit is the annual allowance.

There are two limits, and students often mix them up. First, the limit on tax relief for personal contributions: relief is given on contributions up to the higher of £3,600 gross and 100% of your relevant earnings (broadly, taxable employment and trading income). Second, the annual allowance: a cap on total pension input from you and your employer. Employer contributions need no earnings test. They count towards the annual allowance, but they are not taxable on the employee and are deductible for the employer.

There are two ways personal contributions get relief. Under relief at source, you pay 80% of the gross contribution. The scheme claims the 20% basic rate relief. Higher and additional rate relief comes by extending your basic rate band (and other bands) by the gross contribution. Under a net pay arrangement, your employer deducts the contribution from pay before PAYE, so you get relief at your marginal rate straight away. Bands are not extended.

The annual allowance is £60,000 for 2025/26 (2023/24 and 2024/25 were also £60,000, and 2022/23 was £40,000). If your threshold income exceeds £200,000 and your adjusted income exceeds £260,000, the allowance is tapered. It falls by £1 for every £2 of adjusted income above £260,000, but never below the minimum allowance of £10,000.

If your pension input exceeds the annual allowance, you can use unused allowance carried forward from the previous three tax years, provided you were a member of a registered scheme in those years. Any remaining excess is the annual allowance charge. It is added to your income and taxed at your marginal rates. Separately, the lump sum allowance limits the tax-free cash you can take from a pension. Use the figure given in your exam tables or question rather than memory.

Key rules to remember

Annual allowance 2025/26: £60,000 (minimum allowance £10,000); 2023/24 and 2024/25 were also £60,000. 2022/23 was £40,000. These figures are in the tax tables.
Limit on tax-relievable personal contributions: Higher of £3,600 gross and 100% × relevant earnings; Applies to relief on personal contributions. It does not apply to employer contributions.
Relief at source: net payment: Net payment = Gross contribution × 80%; Gross = Net × 100 ÷ 80; The scheme claims 20% basic rate relief. Extend the basic rate band by the gross contribution for higher and additional rate relief.
Net pay arrangement: Contribution deducted from taxable pay before tax; Full relief at marginal rate. No band extension. NIC is still charged on the pay, as the deduction does not reduce earnings for NIC.
Threshold income test for tapering: Threshold income > £200,000; Broadly net income less gross relief-at-source personal contributions. Both the threshold income and adjusted income tests must be met.
Adjusted income: Net income + employer pension contributions (+ personal contributions given relief via net pay); Taper applies only if adjusted income > £260,000.
Tapered annual allowance: £60,000 − [(Adjusted income − £260,000) ÷ 2], minimum £10,000; Fully tapered to £10,000 once adjusted income reaches £360,000.
Carry forward: Available allowance = Current year AA + unused AA of previous three years (earliest first); Use the current year's allowance first, then the earliest of the three years. Must have been a member of a registered scheme in each year used.
Annual allowance charge: (Pension input − available allowance) × marginal rate; The excess is treated as income and taxed at your marginal rates on top of your other income.

How to solve Pension Contributions and Annual Allowance questions

Use this order for any pension question. It keeps the reliefs and the charge separate.

1Identify the scheme type and who pays: personal contributions (relief at source or net pay) and employer contributions.
2Work out the gross contribution. For relief at source, gross up the net payment by 100 ÷ 80.
3Check the relief limit on personal contributions: higher of £3,600 and relevant earnings. Cap the relievable amount if needed.
4Give income tax relief: for relief at source, extend the basic rate band by the gross amount. For net pay, deduct from pay.
5Test for tapering: is threshold income over £200,000 and adjusted income over £260,000? If so, compute the tapered allowance, with a floor of £10,000.
6Compute total pension input (gross personal plus employer) and compare it with the annual allowance for the year.
7If input exceeds the allowance, use unused allowance from the previous three years, earliest first, after the current year.
8Tax any remaining excess as income at marginal rates, and state the annual allowance charge.

Quickest way: Three-line pension check

When to use it: Use this when the question asks only whether there is a charge, or what the maximum contribution is.

Write the allowance: £60,000, or the tapered figure if adjusted income is over £260,000 and threshold income over £200,000.
Add unused allowance from the three prior years, remembering that 2022/23 started at £40,000.
Subtract employer contributions from the total. The balance is the most gross personal contribution you can make without a charge. Then check it against relevant earnings.

Common mistakes in Pension Contributions and Annual Allowance

Treating the net payment under relief at source as the amount that counts towards the annual allowance.
The cash leaving the bank account is the 80% figure, so it feels like the contribution.
Fix: Always gross up the net payment by 100 ÷ 80. The gross figure counts for the annual allowance and for the relief limit.
Forgetting to include employer contributions in pension input and adjusted income.
Employer contributions do not appear in the employee's salary or taxable income.
Fix: Add employer contributions to personal gross contributions for the annual allowance test. Add them to net income for adjusted income.
Applying the taper without checking threshold income, or tapering below £10,000.
Students remember the £260,000 figure and skip the £200,000 test and the floor.
Fix: Check both thresholds first. After calculating the reduction, compare with the £10,000 minimum allowance.
Using carry forward in the wrong order or using a year more than three years back.
Students add all unused allowances without thinking about the sequence.
Fix: Use the current year's allowance first, then the earliest of the three previous years. Use only the three tax years immediately before the current one.
Giving higher rate relief on a net pay arrangement through band extension.
The two methods are mixed up.
Fix: Net pay: deduct from earnings, and the bands stay unchanged. Relief at source: extend the basic rate band by the gross contribution.
Taxing the annual allowance charge at a flat rate or ignoring the income it sits on.
Students treat the charge as a separate penalty.
Fix: Add the excess to income and tax it at the marginal rates that apply on top of the other income.

Worked examples

Example 1

In 2025/26 Mira has employment income of £250,000 (no other income). Her employer pays £35,000 into her registered pension. Mira pays £24,000 net into a relief at source scheme. She has no unused allowance from earlier years. Calculate her annual allowance charge.

Show the solution

Gross personal contribution = £24,000 × 100 ÷ 80 = £30,000.
Threshold income = £250,000 − £30,000 = £220,000. This is over £200,000, so tapering may apply.
Adjusted income = £250,000 + £35,000 employer contribution = £285,000. This is over £260,000.
Taper reduction = (£285,000 − £260,000) ÷ 2 = £12,500. Tapered allowance = £60,000 − £12,500 = £47,500. This is above the £10,000 minimum.
Pension input = £35,000 + £30,000 = £65,000.
Excess over allowance = £65,000 − £47,500 = £17,500. There is no carry forward, so it is all chargeable.
Mira's income is already above £125,140, so the excess is taxed at 45%. Charge = £17,500 × 45% = £7,875.

Answer: The annual allowance charge is £7,875. The tapered allowance is £47,500 against pension input of £65,000.

Example 2

In 2025/26 Karan has employment income of £90,000 and no other income. His employer contributes £20,000 to his registered pension. Karan was a member of a registered scheme throughout. His pension input was £30,000 in 2022/23, £45,000 in 2023/24 and £50,000 in 2024/25. He wants to make the largest personal contribution under a relief at source scheme without an annual allowance charge. Find the gross contribution, the net payment, and the extra tax saved by higher rate relief.

Show the solution

No tapering applies: his income is below £200,000.
Unused allowance: 2022/23 £40,000 − £30,000 = £10,000. 2023/24 £60,000 − £45,000 = £15,000. 2024/25 £60,000 − £50,000 = £10,000. Total = £35,000.
Total available = £60,000 current year + £35,000 carry forward = £95,000.
Less employer contribution £20,000 = £75,000 maximum gross personal contribution.
Relief limit: relevant earnings are £90,000, so £75,000 is fully relievable.
Net payment = £75,000 × 80% = £60,000. The scheme claims £15,000 basic rate relief.
Tax without the contribution: taxable income = £90,000 − £12,570 = £77,430. £37,700 × 20% = £7,540. £39,730 × 40% = £15,892. Total £23,432.
With the contribution the basic rate band becomes £37,700 + £75,000 = £112,700. All £77,430 is taxed at 20% = £15,486.
Extra higher rate relief = £23,432 − £15,486 = £7,946. This equals £39,730 × 20%.

Answer: The maximum gross contribution is £75,000, paid as £60,000 net. Extending the basic rate band saves a further £7,946 of income tax.

Exam tips

Write out the allowance working in a small table: current year, then each of the three prior years, with input, allowance and unused amount. It earns marks even if one figure is wrong.
Always state the type of scheme in your answer. The marks for the relief method depend on it.
Give the tax saving, not just the contribution. Higher and additional rate relief is the usual reason a client is advised to contribute.
If a question mentions income near £100,000 or over £200,000, check the personal allowance restriction and the taper before anything else.
Use the figures in the tax tables provided. Where a figure such as the lump sum allowance is not given in the table, follow the question's information and state your assumption.

Practice questions from Income tax: 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 Applied SkillsPension Contributions and Annual Allowance

Pension Contributions and Annual Allowance: frequently asked questions

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 claims 20% basic rate relief. Higher rate relief comes by extending your basic rate band. Under a net pay arrangement your employer deducts the contribution before tax, so you get relief at your marginal rate with no band extension.

How does carry forward of unused annual allowance work?

You can add unused annual allowance from the three previous tax years to this year's allowance. You must have been a member of a registered scheme in those years. Use the current year first, then the earliest year first.

How do I calculate the tapered annual allowance in ATX?

Check that threshold income exceeds £200,000 and adjusted income exceeds £260,000. Then reduce £60,000 by £1 for every £2 of adjusted income above £260,000. The allowance cannot fall below the £10,000 minimum.

Do employer contributions count towards the annual allowance?

Yes. Employer contributions count towards pension input and towards adjusted income. They are not taxable on the employee and are deductible for the employer.

How much can I pay into a pension with no earnings?

The maximum contribution that qualifies for tax relief without any earnings is £3,600 gross. The annual allowance limit still applies separately.