SPOTLIGHT ON: Pension allowances
SPOTLIGHT ON:
Pension allowances
Practical steps to keep pension planning on track
Pensions are still one of the most tax-efficient ways to save for the long term.
They can reduce taxable income, support how business owners take money out of their company, and build retirement funds in a structured way.
Where things tend to go wrong is not the idea of contributing - it’s contributing without checking the rules first. That’s when a sensible contribution can lead to an unexpected tax charge.
The good news is that most issues come from a fairly small number of areas: the annual allowance, tapering for higher earners, the money purchase annual allowance (MPAA), and missed carry forward checks.
For the 2025/26 tax year, the standard annual allowance is £60,000, but in some cases it can fall to £10,000.
This guide looks at the key checks to make before contributing and where problems usually arise.
Start with the annual allowance
For most people, the starting point is the standard annual allowance:
- £60,000 for 2025/26
- Applies across all pensions combined, not each one separately
- Going over it can trigger a tax charge if there isn’t enough carry forward available
One of the common misunderstandings is what counts towards that limit.
It’s not just what you personally pay in. It can include:
- Personal contributions
- Employer contributions
- Contributions made by others
- Pension growth under defined benefit schemes
This is why people get caught out - the figure used for tax purposes is often higher than expected.
Tax relief isn’t the same as the allowance
Another area that causes confusion is the difference between tax relief and the annual allowance.
In simple terms:
- The annual allowance is the limit before a potential tax charge
- Tax relief on personal contributions is usually limited to 100% of your earnings
- Employer contributions follow different rules
This is particularly relevant for directors and business owners.
For example, someone with a low salary might assume they can’t contribute much personally, but employer contributions could still be an efficient route. Equally, staying within personal earnings limits doesn’t guarantee you’re within the annual allowance once everything is added together.
Check if tapering applies
For higher earners, the full £60,000 allowance doesn’t always apply.
Tapering can reduce it where:
- Threshold income exceeds £200,000
- Adjusted income exceeds £260,000
If tapering applies:
- The allowance reduces by £1 for every £2 over £260,000
- It can fall to a minimum of £10,000
This is a common source of surprise tax bills, especially where income fluctuates - for example through dividends, bonuses or business profits.
Watch for the MPAA
The money purchase annual allowance (MPAA) is another key area.
For 2025/26, it is £10,000 and can apply if you’ve flexibly accessed a pension.
This often catches people who:
- Take taxable income from a pension
- Assume it’s a one-off decision
- Then later want to contribute again
Once triggered, it can significantly limit future contributions.
Don’t overlook carry forward
Carry forward can make a big difference.
HMRC allows unused allowance from the previous three tax years to be carried forward, subject to conditions.
This is particularly useful where:
- Profits increase
- A business wants to make a larger contribution
- Retirement planning has been delayed
But it’s also an area where assumptions cause problems.
You need to check:
- Whether you were part of a pension scheme in those years
- What your actual allowance was
- Whether tapering applied
- How much was already used
It works well - but only if the numbers are correct.
Where issues usually arise
Most pension tax charges aren’t caused by pensions themselves, but by lack of review.
Common causes include:
- Assuming the allowance is always £60,000
- Missing tapering for higher earners
- Forgetting the MPAA applies
- Ignoring employer contributions
- Relying on carry forward without checking
- Making last-minute contributions without reviewing income
Most of these are avoidable with a simple annual check.
Income changes make this more important
Planning becomes more sensitive where income varies.
Extra care is usually needed if you:
- Take a mix of salary and dividends
- Run your own business
- Receive bonuses or irregular income
- Are approaching retirement
- Have started taking pension withdrawals
In these cases, it’s better to review contributions during the tax year rather than relying on assumptions.
A simple review process
A short review before making contributions can prevent most issues.
This should cover:
- Total pension input for the year
- Whether the full allowance applies
- Whether tapering is relevant
- Whether the MPAA applies
- Available carry forward
- Whether personal or employer contributions are more efficient
It doesn’t need to be complicated - but it does need to happen before money goes in.
Other limits to keep in mind
The annual allowance is the main consideration, but there are other pension limits worth noting.
For 2025/26:
- Lump sum allowance: £268,275
- Lump sum and death benefit allowance: £1,073,100
These are less likely to create immediate issues but still matter for long-term planning.
Final thought
Pensions remain a strong planning tool, but the rules aren’t always as simple as the headline figures suggest.
Most problems aren’t about contributing too much - they’re about not checking first.
A short review each year is usually enough to avoid surprises.
If income is changing or you’ve started accessing pensions, that review becomes more important.
