If you’re an additional rate taxpayer in the UK, there’s one tax rule that can quietly chip away at your pension: the tapered annual allowance.
It’s one of the more complex pension rules and not something many people realise they’re affected by until it’s too late. But once you understand how it works, you can take steps to avoid the worst of it and still make the most of your pension allowances.
What is the tapered annual allowance?
The annual allowance is the maximum amount you can contribute to your pension each tax year and still get tax relief. As of the 2025/26 tax year, this is £60,000, or your relevant earnings, for most people.
The tapered annual allowance applies if both of the following are true:
- your threshold income is more than £200,000, and
- your adjusted income is more than £260,000.
From that point, your annual allowance reduces by £1 for every £2 your adjusted income exceeds £260,000, down to a minimum of £10,000 (if your adjusted income is £360,000 or more).
If your total pension contributions (including those from your employer) exceed your annual allowance, you could face an annual allowance charge on the excess.
Step 1: Work out your threshold income
Threshold income is your total taxable income from all sources, excluding certain pension contributions.
| Include | Exclude |
| Salary, bonuses, and benefits (e.g. company car) | Employer pension contributions |
| Income from self-employment or freelancing | Personal pension contributions under net pay or relief at source |
| Rental income | |
| Dividends | |
| Interest from savings and investments | |
| Other taxable income (e.g. trust or foreign income) |
Example: Calculating threshold income
| Income Source | Amount |
| Salary | £180,000 |
| Rental income | £15,000 |
| Dividend income | £5,000 |
| Total | £200,000 |
Anna’s threshold income is exactly £200,000. Since this doesn’t exceed the threshold, she is not affected by the tapered annual allowance.
Step 2: Calculate your adjusted income
Adjusted income includes all threshold income plus pension contributions made by you or your employer.
| Include | Exclude |
| All threshold income components | Pension contributions made via salary sacrifice before 9 July 2015 |
| Employer pension contributions | |
| Personal contributions where tax relief claimed |
Example: Calculating adjusted income
| Components | Amount |
| Threshold income | £210,000 |
| Employer pension contributions | £60,000 |
| Personal contributions | £10,000 |
| Adjusted income | £280,000 |
Jane’s adjusted income is £20,000 over the £260,000 limit. Her annual allowance is reduced by £10,000 (£1 for every £2 over), dropping her allowance from £60,000 to £50,000
Can I avoid the tapered annual allowance?
The short answer: not easily, but you can manage its impact. Due to the complexity of the rules and interactions (e.g. employer contributions affecting adjusted income), it’s recommended that you speak to a qualified financial adviser.
They can help you:
- Assess if tapering applies to you this year
- Calculate how much you (and your employer) can contribute
- Consider timing and salary structures
- Explore carry forward rules from previous tax years
So what’s the upside?
Yes, the tapered allowance can feel like a punishment for success. But there’s still value in planning:
- Even small pension contributions can benefit from tax-free growth
- Using carry forward and salary sacrifice can unlock serious tax savings
- It leads to better income planning for retirement, especially for high earners juggling multiple income sources
The tapered annual allowance isn’t something you can “opt out” of. It’s built into the UK tax system for high earners. But that doesn’t mean you’re powerless.
Understanding how it works, and proactively managing your contributions, can help you avoid unnecessary tax charges while still building a solid pension for retirement.
And if in doubt? Talk to a financial adviser. When you’re dealing with multiple pensions, variable income, or large employer contributions, the right advice can save you thousands.
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