A Clear Guide for High Earners
For most people, pension contributions are relatively straightforward. You can contribute up to the standard annual allowance each tax year and receive tax relief—currently the lower of £60,000 or 100% of your earnings for the 2025/26 tax year.
However, for higher earners, the rules become more complex. Since 2016, the government has applied a tapered annual allowance, reducing the level of tax-efficient pension funding available to individuals with higher incomes. If you fall into this category, understanding the taper is essential to avoid unexpected tax charges and to plan your contributions effectively.
This guide provides a clear explanation of how the taper works, who it applies to, and what it could mean for your financial planning.
What Is the Standard Annual Allowance?
The annual allowance is the maximum amount you can contribute into your pension each year while still receiving tax relief.
For 2025/26, the standard allowance is:
- £60,000, or
- 100% of relevant UK earnings, whichever is lower.
If you earn £80,000, your allowance remains £60,000.
If you earn £45,000, the allowance is capped at £45,000.
But for high earners, this standard allowance may be reduced through the tapered annual allowance.
What Is the Tapered Annual Allowance?
The tapered annual allowance reduces the amount you can contribute to your pension if your income exceeds two specific thresholds:
1. Threshold Income – £200,000
Threshold income is your total taxable income minus any personal pension contributions.
It includes:
- Salary and bonuses
- Rental income
- Dividends and interest
- Pension income
- Trading profits
If your threshold income does not exceed £200,000, the taper does not apply.
2. Adjusted Income – £260,000
Adjusted income is your threshold income plus all pension contributions—both personal and employer contributions (including salary sacrifice arrangements).
You must breach both:
- Threshold income over £200,000, and
- Adjusted income over £260,000,
for the tapered annual allowance to apply.
How the Taper Works (2025/26 Rules)
If you exceed both thresholds:
- Your annual allowance starts to reduce from £60,000.
- It reduces by £1 for every £2 your adjusted income exceeds £260,000.
- The taper continues until your allowance reaches the minimum of £10,000.
Example
If your adjusted income is £290,000:
- You exceed the £260,000 threshold by £30,000.
- The taper reduces your allowance by £15,000 (£30,000 ÷ 2).
- Your tapered allowance becomes £45,000.
Income Bands and the Resulting Allowance
| Adjusted Income | Annual Allowance |
|---|---|
| £240,000 | £60,000 |
| £260,000 | £60,000 |
| £280,000 | £50,000 |
| £300,000 | £40,000 |
| £320,000 | £30,000 |
| £340,000 | £20,000 |
| £360,000+ | £10,000 (minimum) |
The taper stops once the allowance reaches £10,000. Beyond £360,000 of adjusted income, your annual allowance remains fixed at the minimum.
Why These Rules Changed Over Time
The tapered annual allowance was introduced in April 2016 by then-Chancellor George Osborne. The original thresholds—£110,000 (threshold income) and £150,000 (adjusted income)—resulted in many individuals, including NHS clinicians, unintentionally triggering tapering and receiving unexpected tax charges.
This led to several reforms:
April 2020 changes
- Threshold income increased from £110,000 to £200,000.
- Adjusted income increased from £150,000 to £240,000.
- The minimum tapered allowance reduced from £10,000 to £4,000, creating a much lower possible allowance for very high earners.
April 2023 changes
- Minimum tapered allowance restored to £10,000.
- Adjusted income threshold increased to £260,000.
These improvements were designed to reduce the number of individuals unintentionally affected and to provide more scope for pension funding among higher earners.
A Practical Example of the Rule Changes
Nicola has an adjusted income of £320,000:
- Under the 2022/23 rules, her allowance would have tapered to the minimum of £4,000.
- Under the 2025/26 rules, her allowance is £30,000 instead.
This illustrates how the updated thresholds allow some high earners to contribute significantly more than in previous years.
What Happens If You Exceed Your Tapered Allowance?
If your pension contributions exceed your tapered annual allowance (including employer contributions), the excess is treated as excess pension contributions.
This means:
- The excess amount is added to your taxable income for the year.
- You pay income tax at your marginal rate on the excess.
- This effectively removes the tax relief you received on the contribution.
In some cases, you can ask your pension provider to pay the annual allowance charge through the Scheme Pays facility, although this is not always available.
Exceeding your tapered allowance can therefore:
- Remove the tax advantage of contributing,
- Reduce future pension flexibility, and
- Lead to unexpected tax bills unless monitored carefully.
Why High Earners Need to Be Especially Careful
You may be impacted by the taper if:
- You earn over £200,000 per year.
- Your employer makes significant pension contributions.
- You use salary sacrifice or bonus exchange arrangements.
- Your income varies year to year, such as business owners or consultants.
- You receive large bonuses at year-end.
The taper is highly sensitive to income fluctuations, and employer contributions can unexpectedly push adjusted income above £260,000.
This is why many high earners accidentally trigger tapering without realising it.
Final Thoughts: Should You Seek Professional Advice?
The tapered annual allowance can significantly affect how much you can save tax-efficiently into your pension each year. Because the calculations depend on detailed income definitions and the interaction between salary, bonuses, dividends, and employer contributions, it’s easy to get it wrong.
A professional financial review can help you:
- Confirm whether the taper applies,
- Calculate your correct annual allowance,
- Avoid unexpected tax charges,
- Optimise your pension funding strategy.
If you’re uncertain or your income is close to the thresholds, professional guidance can provide clarity, confidence, and peace of mind.