Saving into a pension is one of the most tax-friendly things you can do with your money. Most contributions get tax relief, so the government effectively tops up what you put in. That includes personal and stakeholder pensions, workplace pensions, and some overseas schemes that qualify for UK tax relief.
There are still limits, though. If you go over them, a tax charge can apply. The rules also changed a fair bit in recent years, so some older guidance is now out of date. Here is where things stand for the 2026/27 tax year.
When you pay tax on your contributions
You get tax relief on your pension savings up to a yearly limit. You may face a tax charge if your contributions in a tax year go above either of these:
The standard annual allowance is £60,000 for the 2026/27 tax year. Separately, tax relief on your own personal contributions is usually limited to 100% of your relevant UK earnings, subject to the pension tax relief rules.
You can also face a charge if your pension provider is not registered with HMRC for tax relief, or does not invest your pot in line with HMRC’s rules. In practice, most well-known providers already meet these requirements.
One big thing has changed. The old lifetime allowance, which used to cap the total value of your pension pot, no longer exists. More on that further down.
What the Annual Allowance Means
Your annual allowance is the most you can pay into your pensions in a tax year while still getting tax relief. Go over it, and the extra is taxed. Stay within it, and you pay nothing extra.
The allowance covers all your private pensions added together. If you have more than one pot, you count the total.
What counts towards it
For a defined contribution pension, you count the total paid in during the tax year. That includes your own money, tax relief, and anything your employer or someone else pays in on your behalf.
For a defined benefit scheme, you count the growth in the value of your pension over the year rather than a cash amount. Your scheme can tell you this figure if you ask.
Carrying forward what you did not use
If you do not use your full allowance, the unused part is not always lost. You can carry forward unused allowance from the previous three tax years, if you were a member of a registered pension scheme in those years.
This is handy after a bonus, a business sale, or any year where you suddenly have more to put away. It lets you make a larger one-off contribution without a tax charge.
When your allowance drops below £60,000
Not everyone gets the full £60,000. Your allowance can fall into two situations. The first is when you start taking money flexibly from a pension. The second is when you are a high earner.
If you start taking money flexibly
Once you flexibly access a defined contribution pension, a lower limit kicks in. This is called the Money Purchase Annual Allowance. It is set at £10,000, according to GOV.UK pension scheme rates and allowances.
Flexibly accessing your pension usually means taking cash from the pot or from a flexi-access drawdown fund, or taking cash or a short-term annuity from it. Simply taking your tax-free lump sum on its own does not normally trigger it.
If you have a high income
High earners can have a reduced allowance, known as the tapered annual allowance. It applies only if both your threshold income is over £200,000 and your adjusted income is over £260,000.
If both apply, your allowance drops by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000. You reach that minimum once your adjusted income is £360,000 or more, according to GOV.UK and HMRC tapered annual allowance guidance.
The figures for earlier tax years may differ, so check the correct year if you are looking back.
If you go over the annual allowance
If you exceed your allowance, your pension provider will send you a statement. If you are in more than one scheme, you can ask each provider for one. HMRC also has an online tool to help you work out any charge.
The extra amount is added to your income and taxed at your normal rate. In some cases, if the charge is large enough, you can ask your scheme to pay it for you and reduce your benefits to cover it.
The lifetime allowance has gone.
This is the biggest change in pension tax for over a decade. The lifetime allowance was abolished from 6 April 2024. The tax charge for going over it had already been removed a year earlier, according to GOV.UK guidance on Individual Lump Sum Allowances.
In plain terms, there is no longer an overall lifetime allowance charge on the total value of your pension savings, although annual allowance rules and lump sum limits can still apply. This is good news for long-term savers, company directors, and anyone with a generous workplace scheme, as per GOV.UK.
If you once held lifetime allowance protection, such as fixed or individual protection, it has not been wasted. That protection now applies to your new lump-sum limits, as mentioned on GOV.UK.
The new limits on tax-free cash
While the pot itself is no longer capped, there is still a limit on how much you can take out tax-free. Two allowances now do this job.
The Lump Sum Allowance sets the total tax-free cash you can take across your lifetime. It is £268,275, which is 25% of the previous lifetime allowance. Anything you take above it is taxed as income at your normal rate, according to the GOV.UK guidance on Individual Lump Sum Allowances.
The Lump Sum and Death Benefit Allowance covers tax-free lump sums paid during your life, plus certain tax-free lump sums paid on death before age 75. It is set at £1,073,100, according to GOV.UK guidance on lump sum and death benefit allowances.
For most savers, these limits will never bite. They mainly affect people with very large pots or generously defined benefit schemes.
How pension tax relief works
Tax relief is the reason pensions are so effective. The government adds money to your pot based on the tax you pay.
A basic rate taxpayer sees a £100 contribution cost just £80. For a higher rate taxpayer, it costs around £60, and for an additional rate taxpayer, around £55, once you claim the extra relief. Basic rate relief is usually added automatically. Higher and additional rate taxpayers claim the rest through Self-Assessment.
When you can take your pension
You can normally start taking a defined contribution pension from age 55. This rises to 57 from 6 April 2028, according to UK pension guidance. Some people have a protected earlier age, often through older schemes joined before 2006 or certain occupations. If you are in one of these schemes, check the exact terms with your provider, as the rules vary from scheme to scheme.
A change worth planning for in 2027
There is one more shift on the horizon. From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a deceased person’s estate for Inheritance Tax purposes, according to HMRC’s technical note on Inheritance Tax on pensions.
If passing your pension on to loved ones is part of your plan, it is worth reviewing your estate strategy well before then. The details are still settling, so keep an eye on updates or take advice closer to the time.
1. Have little or no earnings, can I still receive pension tax relief?
Yes, you might still be able to claim tax relief on pension contributions of up to £3,600 gross per tax year. It will depend on your scheme rules and your situation.
2. Does pension tax relief always accrue automatically?
Not always, because it depends on how your pension scheme provides tax relief. Some schemes give an element of basic rate relief as a contribution to your pot; others provide relief through payroll, and higher- or additional-rate taxpayers may have to claim additional relief.
3. Do I have to notify HMRC of an annual allowance charge?
Usually, yes, if you go over your annual allowance. Even if your pension scheme pays part or all of the charge, it is still necessary to report the charge in Self Assessment.
4. How are inherited pensions taxed?
The amount of inherited pension tax will vary based on the pensioner’s age at death, the payment of pension benefits, and whether the lump-sum limits are exceeded.
Additionally, as from 6 April 2027, all unused pension funds and pension death benefits will be included in the estate for Inheritance Tax.
Conclusion
The landscape has changed, and a good pension decision now requires attention to the detail – the right allowance, the right time and the right funding for you. Do it right, and you may save thousands of pounds and make a more solid retirement; do it wrong, and you could pay a needless tax charge. Whether you want to make the most of your annual allowance and carry-forward entitlement or you would like to structure your contributions in the most tax-efficient way, our chartered accountants and tax advisers can assist you in getting this right, whether you are a business, a director or an individual. Never wait until the last minute of the tax year to do your pension planning, leaving only a portion of the choices available. Contact us today for a free consultation, and our team can outline the best plan for you!
