If your income exceeds certain thresholds, the annual limit on pension contributions eligible for tax relief is reduced. This is the tapered annual allowance (TAA) — a key concern for senior employees, high-earning self-employed professionals, and anyone whose adjusted income exceeds £260,000.
Getting this wrong — contributing more than your reduced allowance — triggers an annual allowance tax charge at your marginal rate on the excess. This guide explains the mechanics and how to plan around them.
The Two Tests
The tapered annual allowance only applies if you fail both of these tests:
| Test | 2026/27 Threshold | Result if exceeded |
|---|---|---|
| Threshold income | £200,000 | Move to adjusted income test |
| Adjusted income | £260,000 | Taper applies for every £2 above £260,000 |
If your threshold income is £200,000 or below, the taper does not apply — even if your adjusted income is higher. The threshold income test acts as a gateway.
What Is Threshold Income?
Threshold income = all taxable income (employment, self-employment, rental, investments) minus your personal pension contributions paid directly (not through salary sacrifice).
Not included in the deduction: employer pension contributions (whether normal or salary sacrifice).
Example
Sophie is a partner in a professional services firm. Her income for 2026/27:
- Salary and bonus: £180,000
- Investment income: £25,000
- Personal pension contribution (net of relief): £4,800 (£6,000 gross)
- Total taxable income: £205,000
- Deduct personal contribution: £205,000 – £6,000 = £199,000
Threshold income = £199,000 — below £200,000. Taper does not apply.
Note: Sophie’s pension contribution choice affects whether the taper applies. This is a legitimate planning tool.
What Is Adjusted Income?
Adjusted income = threshold income plus all pension contributions (employee + employer, including salary sacrifice amounts).
Example (TAA applies)
James earns £280,000 from employment. His employer contributes £28,000 to his workplace pension. He also contributes £10,000 personally.
- Threshold income: £280,000 (no personal contributions to deduct — assume paid via salary sacrifice so already excluded from income)
- Adjusted income: £280,000 + £38,000 (employer + employee total) = £318,000
Adjusted income over £260,000 by £58,000. Taper reduces allowance by £29,000.
James’s annual allowance = £60,000 – £29,000 = £31,000
If total contributions = £38,000, he is within his tapered allowance of £31,000… wait: £38,000 > £31,000. James has an excess of £7,000.
The Taper Calculation
For every £2 of adjusted income above £260,000, the annual allowance reduces by £1:
| Adjusted Income | Reduction | Annual Allowance |
|---|---|---|
| £260,000 | £0 | £60,000 |
| £280,000 | £10,000 | £50,000 |
| £300,000 | £20,000 | £40,000 |
| £320,000 | £30,000 | £30,000 |
| £340,000 | £40,000 | £20,000 |
| £360,000 | £50,000 | £10,000 (minimum) |
| £400,000+ | Capped at £50,000 reduction | £10,000 (minimum) |
The minimum is £10,000. No matter how high the income, the allowance cannot fall below this.
The Annual Allowance Charge
If total pension contributions (employee + employer) exceed your tapered annual allowance, the excess is subject to an annual allowance charge. This is added to your income tax bill and charged at your marginal rate:
- Basic rate (20%): £X excess taxed at 20%
- Higher rate (40%): £X excess taxed at 40%
- Additional rate (45%): £X excess at 45%
For most people subject to the TAA, the charge will be at 45%.
Scheme Pays
If the charge is £2,000 or more AND the excess is over £10,000, you can elect for scheme pays — the pension scheme pays the charge from your pension pot and reduces your eventual benefits. This avoids a large tax bill in the year.
Carry Forward and the Tapered Annual Allowance
You can still carry forward unused allowance from the previous 3 tax years to offset an excess in the current year. However:
- Carried forward amount = the tapered amount for that prior year, not the standard £60,000
- You must have been a registered pension scheme member in the carry-forward year
- You cannot carry forward if you had no qualifying pension membership in that year
Carry Forward Example
| Year | Standard AA | TAA | Actual contributions | Unused |
|---|---|---|---|---|
| 2023/24 | £60,000 | £35,000 | £20,000 | £15,000 carry forward |
| 2024/25 | £60,000 | £30,000 | £28,000 | £2,000 carry forward |
| 2025/26 | £60,000 | £25,000 | £22,000 | £3,000 carry forward |
| 2026/27 | £60,000 | £20,000 | £35,000 | Excess of £15,000 — but can use carry forward (£15k + £2k + £3k = £20k available) |
The excess of £15,000 in 2026/27 is offset by carry forward. No charge.
Planning Strategies
1. Manage Threshold Income Below £200,000
If threshold income is barely over £200,000, increasing personal pension contributions (direct, not salary sacrifice) reduces threshold income. This can keep you below the £200,000 gateway entirely.
2. Salary Sacrifice Caution
Salary sacrifice contributions increase adjusted income (because they are employer contributions). Switching from personal contributions to salary sacrifice may seem the same tax-wise but counts differently for the TAA calculation — potentially making adjusted income worse.
3. Defer Bonus or Income
If possible and appropriate, deferring a bonus from late in one tax year to early in the next can keep adjusted income below £260,000 in the higher year. This requires employer cooperation.
4. ISA and Non-Pension Savings
For those with minimum annual allowances (£10,000), it may make more sense to save into ISAs rather than pensions — you avoid the annual allowance charge and ISA funds are more accessible.
5. Employer-Only Contributions
Where the employer contributes to hit the tapered allowance exactly, the individual avoids additional charges. High earners sometimes negotiate lower salary in exchange for higher employer pension contributions.
Defined Benefit Schemes and the TAA
For defined benefit schemes, pension input is calculated differently — it is the annual accrual multiplied by 16, plus any additional cash lump sum accrual. A DB scheme with a final salary increase and years of service growth can generate large “pension input” even without cash contributions.
Senior employees in public sector DB schemes should check their annual benefit statements carefully — they may be in breach of the TAA without realising it.