The Tapered Annual Allowance — Does It Affect You?

The Accounted Tax Team·3 March 2026·8 min read

If you're a high earner who makes substantial pension contributions, there's a particular piece of tax legislation that could catch you out: the tapered annual allowance. It's one of those rules that only affects a relatively small number of people, but if it does affect you, the consequences can be significant — potentially resulting in a hefty and unexpected tax charge.

In this guide, we'll explain what the tapered annual allowance is, how it works in the 2025/26 tax year, who it affects, and what you can do to plan around it. Even if you think your income isn't high enough to be caught, it's worth understanding the rules — because the definition of "income" for these purposes might be broader than you think.

What Is the Annual Allowance?

Before we get into the taper, let's start with the basics. The annual allowance is the maximum amount of pension savings you can make in a tax year while still receiving tax relief. For 2025/26, the standard annual allowance is £60,000 (or 100% of your relevant UK earnings, whichever is lower).

If you exceed the annual allowance, you don't lose the excess contribution — it stays in your pension — but you face an annual allowance charge. This charge is essentially clawing back the tax relief you received on the excess amount, and it's charged at your marginal rate of income tax.

The lifetime allowance, which previously capped the total value of your pension savings, was abolished from April 2024, so you no longer need to worry about that. But the annual allowance very much remains in force.

How the Taper Works

The tapered annual allowance reduces the standard £60,000 annual allowance for individuals with high income. It was introduced to limit the tax relief available to the highest earners.

The Two Income Tests

To be caught by the taper, you must exceed both of the following thresholds:

Threshold income above £200,000 — this is broadly your net income before pension contributions (but after certain deductions like Gift Aid and trading losses).
Adjusted income above £260,000 — this is your threshold income plus the value of any pension contributions made by you or your employer.

If your threshold income is £200,000 or below, the taper doesn't apply to you regardless of your adjusted income. This is an important safety net — if your pre-pension income is under £200,000, you keep the full £60,000 annual allowance.

The Rate of Reduction

For every £2 of adjusted income above £260,000, your annual allowance is reduced by £1. This continues until the annual allowance reaches a minimum floor of £10,000, which happens at an adjusted income of £360,000.

Here's a quick reference:

| Adjusted Income | Annual Allowance | |---|---| | £260,000 or below | £60,000 | | £280,000 | £50,000 | | £300,000 | £40,000 | | £320,000 | £30,000 | | £340,000 | £20,000 | | £360,000 or above | £10,000 |

Calculating Your Threshold and Adjusted Income

The definitions of threshold income and adjusted income are specific and don't necessarily match what you might think of as your "income." Getting the calculation right is crucial.

Threshold Income

Start with your net income for tax purposes (all income sources, less certain deductions such as trading losses and Gift Aid donations). Then:

Deduct any pension contributions you've made under net pay arrangements (i.e., contributions taken from your salary before tax).
Add back any pension contributions for which you've claimed relief at source (i.e., contributions to personal pensions where basic rate relief was added automatically).

The aim is to arrive at your income before the effect of pension contributions.

Adjusted Income

Start with your threshold income and then:

Add the value of all pension contributions — both your own and your employer's. For defined benefit (final salary) schemes, this is measured using a specific formula based on the increase in your pension entitlement.

A Practical Example

Raj has a salary of £230,000, and his employer contributes £40,000 to his workplace pension.

Threshold income: £230,000 (salary, as pension contributions are employer-funded and don't need adding back in this scenario). This is above £200,000, so the first test is met.
Adjusted income: £230,000 + £40,000 = £270,000. This is above £260,000, so the taper applies.
Tapered allowance: £60,000 – ((£270,000 – £260,000) / 2) = £60,000 – £5,000 = £55,000.

Raj's employer contribution of £40,000 is within his tapered allowance of £55,000, so there's no annual allowance charge. But if the employer contribution had been £60,000, he'd have exceeded his tapered allowance by £5,000, triggering a tax charge.

Who Is Most at Risk?

The tapered annual allowance primarily affects:

Senior professionals (partners in law or accountancy firms, senior doctors and consultants, executives)
Business owners paying themselves substantial dividends alongside a salary
Anyone with large employer pension contributions that push adjusted income above £260,000
Self-employed people with profits above £200,000 who also make significant pension contributions

NHS Doctors — A Special Case

Senior NHS doctors have been particularly affected by the tapered annual allowance because their defined benefit pension scheme can generate large increases in pension entitlement from year to year, especially following pay rises or changes in role. The government introduced a scheme-pays option and temporary flexibilities to address some of these issues, but the taper remains a significant planning consideration for medical professionals.

Using Carry Forward to Mitigate the Taper

Even if your annual allowance is reduced by the taper, you may still be able to make larger contributions by using carry forward. This allows you to use any unused annual allowance from the previous three tax years.

Important points about carry forward with the taper:

The carry forward amount is based on the annual allowance that applied in each previous year — including any taper that applied in those years.
You must have been a member of a registered pension scheme in each year you want to carry forward from.
Your contributions in the current year must be covered by your current year earnings.

Example: Priya has a tapered annual allowance of £30,000 in 2025/26. In the three previous years, she had unused annual allowance of £15,000, £20,000, and £10,000. She can potentially contribute up to £75,000 in 2025/26 (£30,000 current year + £45,000 carry forward), assuming her earnings support this level of contribution.

Strategies to Manage the Taper

If you're caught or at risk of being caught by the taper, here are some planning strategies to consider.

Salary Sacrifice

If your employer offers salary sacrifice, exchanging salary for employer pension contributions can sometimes help. While the pension contributions will increase your adjusted income, the reduction in salary reduces your threshold income. If salary sacrifice brings your threshold income to £200,000 or below, the taper doesn't apply at all, regardless of your adjusted income.

Spreading Contributions Across Years

Rather than making a large one-off pension contribution, consider spreading contributions more evenly across multiple tax years to stay within your tapered annual allowance each year. This requires forward planning but can be more tax-efficient overall.

Maximising Gift Aid

Gift Aid donations reduce both your threshold income and your adjusted income. If you're already giving to charity, making sure those donations are Gift Aid eligible can help keep you below the taper thresholds.

Spousal Planning

If you're married or in a civil partnership, consider whether your spouse could make pension contributions using their own annual allowance. While you can't simply transfer your allowance, restructuring how family income and assets are held might allow both partners to make pension contributions within their respective allowances. For more on this, see our guide to how married couples can save tax.

What Happens If You Exceed Your Tapered Allowance?

If your total pension contributions (including employer contributions) exceed your tapered annual allowance, you'll face an annual allowance charge. This is added to your income tax bill through Self Assessment.

The charge is designed to claw back the tax relief you received on the excess contributions, so it's calculated at your marginal tax rate. For someone in the taper range, this will typically be 40% or 45%.

You can ask your pension scheme to pay the charge on your behalf using the "scheme pays" option, which reduces your future pension benefits. This must be requested by 31 July following the end of the tax year in which the charge arose.

Keeping Track of Your Position

The tapered annual allowance makes pension planning more complex, and it's not something you want to get wrong. If your income is anywhere near the threshold, it's worth:

Calculating your threshold and adjusted income carefully each year, including all sources of income.
Checking your employer's pension contributions and understanding how they count towards your allowance.
Reviewing carry forward availability from the previous three years.
Keeping records of all pension contributions and the annual allowance used each year.

If you're a sole trader with high earnings, Accounted can help you keep a clear picture of your income throughout the year, so you know well before the tax year end whether the taper is likely to bite. Catching it early gives you time to adjust your contributions or take other action.

For most people, the standard £60,000 annual allowance provides ample room for pension saving. But if you're fortunate enough to earn above the taper thresholds, a bit of planning can prevent an unwelcome surprise on your tax bill.

Accounted helps UK sole traders stay on top of their bookkeeping and tax. Start your free 30-day trial at getaccounted.co.uk

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