Tapered Annual Allowance Explained for High Earners

This article is for general information only and does not constitute personal financial, investment, pension, tax, or legal advice. Pension tax rules and tax planning can involve matters outside Financial Conduct Authority regulation. Tax treatment depends on individual circumstances and may change. The value of investments can fall as well as rise, and you may get back less than has been invested. Pension benefits are generally not accessible before the applicable minimum pension age, subject to scheme rules and limited exceptions.

For higher earners, pension planning can become more complicated once income reaches the levels at which the annual allowance may start to reduce.

The tapered annual allowance can restrict the amount of pension saving available before an annual allowance tax charge may arise. The calculation is not based on salary alone. Bonuses, dividends, other taxable income and pension contributions can all affect your position.

For the 2026/27 tax year, the standard pension annual allowance is £60,000. For people affected by tapering, however, it can reduce to as little as £10,000.

Understanding where you stand before making a substantial pension contribution can help reduce the risk of an unexpected tax charge and provide a clearer basis for wider retirement planning.

What is the tapered annual allowance?

The tapered annual allowance is a reduced pension annual allowance that can apply to higher earners who meet two income tests.

For 2026/27, tapering can apply when both of the following conditions are met:

• Your threshold income is more than £200,000.
• Your adjusted income is more than £260,000.

If your threshold income is £200,000 or less, the taper does not apply, regardless of your adjusted income.

Where both tests are met, the standard £60,000 annual allowance is reduced by £1 for every £2 of adjusted income above £260,000. The allowance cannot fall below £10,000 under the current rules.

HMRC's guidance on working out your tapered annual allowance explains the income tests and calculation in more detail.

Assuming your threshold income exceeds £200,000, the taper works broadly as follows:

Why are threshold income and adjusted income different?

The two income tests are where the taper often becomes difficult to follow.

Someone earning less than £260,000 may still have adjusted income above that figure once other income and pension funding are included.

Equally, someone with adjusted income above £260,000 will not normally be affected by the taper if their threshold income is £200,000 or less.

Threshold income

Threshold income starts broadly with your taxable income and then makes specific adjustments, including for certain pension contributions.

Depending on your circumstances, taxable income may include:

• employment income
• bonuses
• self-employed or partnership income
• dividends
• savings income
• rental income
• pension income
• certain other taxable income

The exact calculation matters, particularly where pension contributions or salary sacrifice arrangements are involved, so it should not be estimated from salary alone.

Adjusted income

Adjusted income takes pension saving into account more fully.

Employer pension contributions can be particularly important. A substantial employer contribution may mean adjusted income is higher than your taxable salary alone suggests.

For a broader look at how these considerations can interact with retirement decisions, our guide to pension planning for high earners covers pension allowances alongside income, access requirements and longer-term objectives.

How is the tapered annual allowance calculated?

Once both income figures are known, the taper itself can be calculated.

Step 1: Check threshold income

First, calculate your threshold income for the relevant tax year.

If it is £200,000 or less, the tapered annual allowance will not apply.

Step 2: Check adjusted income

If threshold income is above £200,000, calculate your adjusted income.

If adjusted income is £260,000 or less, you will normally retain the standard £60,000 annual allowance, subject to any other pension allowance restrictions that may apply.

Step 3: Calculate the excess

Suppose your threshold income exceeds £200,000 and your adjusted income is £320,000.

The amount above the adjusted income threshold is:

£320,000 - £260,000 = £60,000

Step 4: Divide the excess by two

The annual allowance is reduced by £1 for every £2 of excess adjusted income:

£60,000 ÷ 2 = £30,000

Step 5: Deduct the reduction

Deduct the £30,000 reduction from the standard £60,000 annual allowance:

£60,000 - £30,000 = £30,000

The tapered annual allowance in this example would therefore be £30,000.

Once adjusted income reaches £360,000, the maximum £50,000 reduction has been reached, and the tapered annual allowance remains at its £10,000 minimum under the current rules.

What pension savings count towards the annual allowance?

The annual allowance applies across your pension arrangements. It is not a separate allowance for every pension you hold.

For defined contribution pensions, pension input generally includes gross contributions made by:

• you
• your employer
• another person on your behalf

This is particularly relevant for higher earners receiving substantial employer contributions.

Defined benefit pensions work differently. Instead of simply counting your contributions, the annual allowance calculation considers the increase in the value of the pension benefits built up during the pension input period.

A pay rise, promotion or change in pension benefits can therefore result in a larger pension input amount even where you have not personally made a significant additional contribution.

Can you use carry forward with a tapered annual allowance?

Potentially, yes.

Carry forward allows unused annual allowance from the previous three tax years to be considered in the current year, provided the relevant conditions are satisfied.

For 2026/27, those years are:

1. 2023/24
2. 2024/25
3. 2025/26

You generally need to have been a member of a registered pension scheme during the year from which you want to carry unused allowance forward.

The current year's allowance is used first, followed by available unused allowance from the earliest of the previous three years. HMRC explains how to check unused annual allowance from previous tax years.

A higher earner should not simply assume that £60,000 was available in every previous year. If the tapered annual allowance applied in an earlier year, the reduced allowance that actually applied needs to be used when calculating the unused amount.

Our guide to the pension carry forward rules explains how previous contributions, tapering and pension scheme membership can affect the amount potentially available.

It is also important to distinguish carry forward from tax relief on personal pension contributions. Carry forward can increase the annual allowance available when testing pension input, but separate rules determine how much tax relief is available on personal contributions.

HMRC's guidance on tax relief on private pension contributions explains those limits, including the role of relevant earnings.

What happens if you exceed your tapered annual allowance?

The annual allowance is not an absolute contribution limit.

However, if your pension input exceeds your available annual allowance after any valid carry forward has been considered, an annual allowance tax charge may arise. Separate limits also apply to tax relief on personal pension contributions.

An annual allowance tax charge may apply where pension savings exceed your available annual allowance after any available carry forward has been taken into account. Tax treatment depends on individual circumstances. Before making significant pension contributions, it is important to understand how the relevant pension allowances and tax rules apply to you.

The annual allowance charge is broadly calculated by applying the appropriate Income Tax rate or rates to the excess pension saving, taking your taxable income into account.

In some circumstances, a pension scheme may be able to pay some or all of an annual allowance charge through Scheme Pays. Eligibility requirements and deadlines apply, and the option should not be assumed to be available in every case.

Where Scheme Pays is used, the scheme will normally make an appropriate reduction to your pension benefits in return for paying the charge. The longer-term effect on those benefits therefore also needs to be considered.

Our article on the annual allowance charge explains what may happen when pension input exceeds the allowance available to you.

Whether making a contribution that results in an annual allowance charge remains appropriate will depend on individual circumstances, including tax treatment, employer contributions, cash flow, retirement objectives and alternative uses of the money.

Common tapered annual allowance mistakes

Higher earners can run into problems when the calculation is treated as a simple salary test.

Some of the issues to watch for include:

• assuming the full £60,000 annual allowance is automatically available
• looking only at salary and ignoring other taxable income
• forgetting employer pension contributions when calculating adjusted income
• treating £60,000 as a separate allowance for each pension
• overlooking pension growth within a defined benefit scheme
• assuming previous years had the full annual allowance when tapering may have applied
• confusing carry forward with entitlement to personal pension tax relief
• making a substantial contribution without checking whether the money purchase annual allowance has previously been triggered

Variable bonuses, dividends or employer pension contributions can make the calculation look very different from one tax year to the next.

What should high earners check before contributing?

For higher earners, it is worth establishing the allowance position before making a large pension contribution rather than reconstructing it afterwards.

Before contributing, relevant factors may include:

1. Your expected taxable income for the tax year.
2. Bonuses, dividends and other relevant income that may affect the calculation.
3. Personal pension contributions already made.
4. Employer pension contributions across all schemes.
5. Defined benefit pension growth, where applicable.
6. Threshold and adjusted income for the relevant year.
7. Unused annual allowance from the previous three tax years.
8. Whether another allowance restriction applies, particularly following flexible pension access.
9. How the contribution fits your wider financial position, rather than focusing solely on tax.

A pension contribution may appear tax-efficient when considered on its own but can reduce the capital you have available for other priorities. Pension benefits are also generally inaccessible until the applicable minimum pension age, subject to scheme rules and limited exceptions.

Tapering does not, by itself, determine whether a pension contribution is appropriate. The potential benefits, tax consequences, access restrictions and wider financial position should be considered together.

Planning beyond the tapered annual allowance

For high earners, the most useful question is rarely simply, "How much can I pay into my pension?"

We would normally consider how a proposed contribution fits alongside existing pensions, investments, cash requirements, expected retirement date, future income needs and your wider financial position. This can be particularly relevant where the tapered annual allowance, carry forward or substantial employer contributions make the calculations less straightforward.

Our Retirement and Pension Planning service considers pension decisions within the wider retirement picture, taking account of individual circumstances, objectives and longer-term financial needs.

If you are considering a significant pension contribution or want to understand how pension allowances could affect your wider retirement plans, visit our Retirement and Pension Planning page to find out more about the service.

What the tapered annual allowance means for your planning

The tapered annual allowance can reduce the standard £60,000 annual allowance substantially for higher earners, but salary alone does not determine whether it applies.

Both threshold income and adjusted income need to be calculated. Pension input across different arrangements, employer contributions, unused allowances from previous years and earlier pension access can also affect the position.

Checking these figures before making a substantial contribution can provide a clearer basis for planning. The aim is not simply to contribute as much as possible, but to consider pension decisions alongside your wider financial circumstances and retirement objectives.

This article is for information only and should not be treated as personal financial, investment, pension, tax or legal advice or as a personal recommendation. Pension and tax rules can change, and their effect will depend on individual circumstances. The value of investments can fall as well as rise, and you may get back less than has been invested. Pension benefits are generally not accessible before the applicable minimum pension age, subject to scheme rules and limited exceptions. Where appropriate, regulated financial advice and separate tax or accounting advice should be sought.



McCarthy Wealth is a trading style of Clarity Wealth Management LLP. Clarity Wealth Management LLP is authorised and regulated by the Financial Conduct Authority (FCA) and is entered on the Financial Services Register under Firm Reference Number 575252.