Pensions are one of the most tax-efficient ways to save, but the rules on how much you can pay in are some of the most confusing in the tax system. There isn't one limit, there are several. They measure different things, they apply at different points, and two of them have almost identical names.
Below, we go through each limit for the 2026/27 tax year, with worked examples, and finish with the mistakes we see most often.
The key numbers for 2026/27
Annual allowance: £60,000
Tax relief on your own contributions: up to 100% of your relevant UK earnings, or £3,600 gross if higher
Tapered annual allowance: applies only if threshold income is over £200,000 and adjusted income is over £260,000
Minimum tapered annual allowance: £10,000
Money purchase annual allowance (MPAA): £10,000
Carry forward: unused annual allowance from the previous three tax years
Lump sum allowance (tax-free cash): £268,275 for most people
1. Two separate questions: tax relief and the annual allowance
Most of the confusion comes from mixing up two separate tests:
How much tax relief can I get on my own contributions? This is limited by your relevant UK earnings.
How much can go into my pensions in total before a tax charge? This is the annual allowance, and it counts contributions from everyone, including your employer.
You need to pass both. A contribution can be well within the annual allowance and still not qualify for tax relief, and the reverse is also true.
2. Relevant UK earnings: the limit on tax relief
You get tax relief on your personal contributions up to the higher of:
100% of your relevant UK earnings for the tax year, or
£3,600 gross (£2,880 net), even if you have no earnings at all.
Relevant UK earnings include employment income (salary, bonuses and taxable benefits in kind) and self-employed or partnership trading profits.
They do not include dividends, rental income, interest, pension income or capital gains. Furnished holiday lets used to count, but that regime was abolished from April 2025, so holiday let profits no longer do.
Why this matters for company directors. A director who takes a £12,570 salary and the rest as dividends can only get tax relief on personal contributions of up to £12,570 gross a year, however large the dividends. Employer contributions paid by the company are not restricted by the director's earnings. They are usually deductible for corporation tax as long as the overall remuneration package is reasonable, and they don't attract National Insurance, so for most owner-managers they are the more efficient route.
How the relief is given. Under relief at source (most personal pensions and SIPPs), you pay £80 and the provider claims £20 basic rate relief from HMRC. Higher and additional rate taxpayers claim the rest through their Self Assessment return. Under a net pay arrangement (many workplace schemes), your contribution is taken from your pay before tax, so you get full relief automatically.
3. The annual allowance: £60,000
The annual allowance caps the total going into all your pensions in a tax year. It counts:
your own contributions (gross, including the tax relief added)
your employer's contributions
anything anyone else pays in for you
for defined benefit (final salary or career average) schemes, the increase in the value of your benefits during the year, not what you actually pay in. Broadly, this is 16 times the increase in your annual pension, after an allowance for inflation.
If you go over, the excess is taxed at your marginal rate through the annual allowance charge, which is reported on your Self Assessment return. If the charge is over £2,000 and the excess is in one scheme, you can usually ask that scheme to pay it ("Scheme Pays") in return for a reduction in your pension. The deadline for this election is 31 July in the year after the Self Assessment filing deadline.
Carry forward
You can use unused annual allowance from the previous three tax years, as long as you were a member of a registered pension scheme in each year you're carrying forward from (even if nothing was paid in). You use the current year's allowance first, then the earliest year.
The trap: carry forward increases your annual allowance, not your relief limit. A director on a £12,570 salary still can't get tax relief on a £100,000 personal contribution. The company, however, could make a £100,000 employer contribution using carry forward.
For 2026/27, carry forward is available from 2023/24, 2024/25 and 2025/26. Any unused allowance from 2023/24 is lost after 5 April 2027.
4. The tapered annual allowance: threshold income and adjusted income
For higher earners, the £60,000 allowance can be reduced. The taper only applies if both of these are true:
threshold income is over £200,000, and
adjusted income is over £260,000.
If both apply, your allowance falls by £1 for every £2 of adjusted income over £260,000, down to a minimum of £10,000. That minimum is reached at adjusted income of £360,000.
Threshold income is broadly your net income (total taxable income less certain reliefs), less your gross personal contributions under relief at source. Employer contributions are not included. Any salary given up under a salary sacrifice arrangement made after 8 July 2015 is added back, so you can't use salary sacrifice to get under the £200,000 test.
Adjusted income is broadly your income before any pension contributions: net income, plus all pension contributions made by you and your employer (including contributions taken from pay before tax and, for defined benefit schemes, the value of benefits built up).
Threshold income acts as a gatekeeper. It protects people whose income is under £200,000 but whose adjusted income looks high only because of large employer contributions.
Example 1: large employer contributions, no taper. Priya has a salary of £190,000 and £5,000 of rental profit, so her net income is £195,000. Her employer pays £75,000 into her pension, using £15,000 of carry forward. Her adjusted income is £270,000, but her threshold income is only £195,000, so the taper doesn't apply and she keeps the full £60,000 allowance.
Example 2: director paid in dividends. Mark takes a salary of £12,570 and dividends of £250,000. His company pays £30,000 into his pension.
Threshold income: £262,570, which is over £200,000
Adjusted income: £262,570 + £30,000 = £292,570
Excess over £260,000: £32,570, so his allowance is reduced by £16,285
Tapered annual allowance: £60,000 − £16,285 = £43,715
The company's £30,000 contribution is within his tapered allowance, so there is no charge.
Don't confuse "adjusted income" with "adjusted net income"
Adjusted net income is a different measure. It decides whether you lose your personal allowance (between £100,000 and £125,140) and whether the High Income Child Benefit Charge applies (between £60,000 and £80,000). Personal pension contributions reduce adjusted net income, which is why contributions can be so valuable in the £100,000 to £125,140 band, where the effective rate of tax is 60%.
Adjusted income, for the pension taper, adds pension contributions back. Similar names, opposite effect.
5. The money purchase annual allowance (MPAA): £10,000
The MPAA stops people taking money out of a pension and paying it straight back in to get a second round of tax relief. It is triggered the first time you flexibly access a defined contribution pension, for example by:
taking taxable income from flexi-access drawdown
taking an uncrystallised funds pension lump sum (UFPLS)
buying a flexible annuity, where the income can go down
taking more than the limit from an old capped drawdown arrangement.
It is not triggered by taking only your tax-free cash, buying a standard lifetime annuity, taking small pots of up to £10,000 under the small pots rules, or drawing a defined benefit pension.
Once triggered, the MPAA applies for the rest of your life:
contributions to defined contribution pensions (yours and your employer's combined) are limited to £10,000 a year
carry forward cannot be used to increase it
any defined benefit savings get an "alternative annual allowance" of £50,000 (or less if you're also tapered).
When you trigger the MPAA, your provider sends you a flexible access statement. You must tell any other pension schemes you're an active member of within 91 days, or you can be charged a penalty.
The common trap is someone in their late 50s who takes a small taxable sum from a pension to bridge a gap, while still working and paying into a workplace scheme or having their company contribute. A single taxable withdrawal is enough to trigger the MPAA permanently.
6. Other changes worth knowing about
Tax-free cash: the lump sum allowance is £268,275 for most people, and the lump sum and death benefit allowance is £1,073,100.
Minimum pension age: rises from 55 to 57 from 6 April 2028, unless you have a protected pension age.
Inheritance tax: from 6 April 2027, most unused pension funds and death benefits will be included in your estate for inheritance tax.
Salary sacrifice: from 6 April 2029, only the first £2,000 a year of pension contributions made through salary sacrifice will be free of National Insurance. Income tax relief is not affected.
Common mistakes we see
Making personal contributions based on dividend or rental income, which isn't relevant UK earnings. The excess gets no relief, and HMRC can recover basic rate relief the provider has already claimed.
Assuming carry forward increases the amount you can get relief on.
Forgetting that employer contributions count towards both the annual allowance and adjusted income.
Not claiming higher or additional rate relief on relief at source contributions through Self Assessment.
Overlooking defined benefit schemes. A pay rise or promotion in an NHS, teachers' or other public sector scheme can cause an annual allowance charge without any extra contribution.
Triggering the MPAA without realising, or missing the 91-day notification.
Missing the Scheme Pays deadline.
The bottom line
Work through the limits in order. First, check how much relief you can get on your own contributions (relevant UK earnings). Then check how much can go in from all sources (the annual allowance, plus any carry forward). If your income is over £200,000, check whether the taper applies. If you've ever taken taxable money from a defined contribution pension, check whether the MPAA applies.
If you're planning a large contribution, have taken money out of a pension, or have had a pension savings statement from your scheme, get in touch before 5 April 2027. That's the deadline for using this year's allowance and any unused allowance from 2023/24.
This article is general information based on the rules for 2026/27 and isn't personal tax or financial advice. Please take advice before acting.