Pension Annual Allowance 2026: What You Can Contribute
What Is the Pension Annual Allowance?
The annual allowance is the maximum amount you can contribute to pensions in a tax year and still receive tax relief. For 2025/26, the annual allowance is £60,000.
This limit applies to the total of all pension contributions — personal contributions, employer contributions, and tax relief. If you have multiple pensions, the limit applies across all of them combined.
Key Rules
The Earnings Cap
You can only receive tax relief on contributions up to 100% of your relevant earnings. If you earn £35,000, your maximum relievable contribution is £35,000 — not £60,000.
Tapered Annual Allowance
If your adjusted income exceeds £260,000, your annual allowance is reduced by £1 for every £2 above £260,000, down to a minimum of £10,000. This affects very high earners.
Money Purchase Annual Allowance
If you have already started taking money from a defined contribution pension through drawdown (beyond the 25% tax-free lump sum), your annual allowance for money purchase pensions drops to £10,000. This is the Money Purchase Annual Allowance (MPAA).
What Happens If You Exceed the Allowance?
If your total pension contributions exceed the annual allowance, you face an annual allowance charge. The excess is added to your taxable income and taxed at your marginal rate.
For example, if you contribute £70,000 and the allowance is £60,000, the £10,000 excess is added to your income. If you are a higher rate taxpayer, the charge would be £4,000 (40% of £10,000).
You report and pay the charge through your Self Assessment tax return. If the charge exceeds £2,000, you can ask your pension scheme to pay it from your pension pot.
Carry Forward: Using Previous Years' Allowance
If you did not use your full annual allowance in the previous three tax years, you can carry the unused amount forward. This is a valuable strategy for self-employed people with variable income.
How It Works
- Use the current year's allowance first (£60,000)
- Then use unused allowance from 3 years ago
- Then from 2 years ago
- Then from last year
Example
- 2022/23: earned £40,000, contributed £5,000 — unused: £35,000
- 2023/24: earned £45,000, contributed £10,000 — unused: £35,000
- 2024/25: earned £50,000, contributed £8,000 — unused: £52,000
- 2025/26: earned £80,000
Available allowance for 2025/26: £60,000 + £35,000 + £35,000 + £52,000 = £182,000
But limited to 100% of current earnings: £80,000
So you could contribute up to £80,000 in 2025/26 using carry forward, all with tax relief.
Strategies for Self-Employed People
Lean Years: Contribute What You Can
In years with low income, contribute what you can afford. The unused allowance carries forward for three years, giving you the opportunity to catch up later.
Profitable Years: Maximise Contributions
In a particularly good year, use carry forward to make a larger contribution. This reduces your tax bill significantly — a higher rate taxpayer contributing £60,000 saves £24,000 in tax.
Year-End Planning
Review your income and contributions before 5 April each year. If you have room, a last-minute contribution can reduce your tax bill for the year.
Track your earnings year-round with Accounted to make informed pension decisions.
Know your allowance, use your allowance. Sign up for Accounted and let Penny help you plan contributions that maximise your tax relief.
Tax & Compliance Specialists
Our tax specialists have decades of combined experience in UK sole trader and small business taxation, MTD compliance, and HMRC submissions. All content is reviewed against current HMRC guidance before publication and updated quarterly to reflect legislative changes.
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