Annual Allowance Charge: Pay or Cancel It (2026/27)

You have a charge - now what?

You are reading this because you already know the bad news: your pension savings for the year have gone over your available allowance. Maybe our calculator told you, maybe a payslip or an annual savings statement did. The harder question - the one most pages skate over - is what you actually do about it.

First, the two-line recap. The annual allowanceThe most you can pay into pensions each tax year with tax relief - £60,000 for 2026/27, covering your own, your employer's and any third-party contributions. Exceeding it triggers a tax charge. caps the pension savings you can make each tax year before a charge applies - £60,000 for 2026/27, reduced for high earners under the tapered annual allowanceThe reduction of the annual allowance for high earners: once adjusted income tops £260,000, the allowance falls £1 for every £2 of excess, down to a £10,000 floor at £360,000.. If you want the mechanics of the taper and its two income tests, our pension annual allowance guide covers them and the Tapered Annual Allowance Calculator works out your figure. This page picks up where they leave off.

Once you have a charge there are only two routes, and they run in order. First, check whether carry forwardAdding unused annual allowance from the previous 3 tax years to the current year's allowance. You must have been a pension scheme member in each year you carry forward from. can make the charge disappear. If a charge still remains, then deal with paying it - and work out whether you or your pension scheme picks up the bill.

Step 1 - Can carry forward make the charge go away?

Before you pay anything, check carry forward. Unused allowance from the previous 3 tax years is added to this year's allowance, and you can use it even if you are tapered. The order is fixed: the current year's allowance first, then the earliest of the three years, working forward. You must have been a member of a registered pension scheme in each year you carry forward from.

The subtlety the generalist pages miss: if you were tapered in one of those earlier years, only that year's unused tapered allowance carries forward - not a flat £60,000. So a high earner who has been tapered for years may have far less to carry forward than they expect. The calculator applies this ordering for you and shows whether any charge actually remains.

Step 2 - If a charge remains, what is it?

Whatever excess is left after carry forward is the annual allowance chargeThe tax charge due when your pension savings in a tax year exceed your available annual allowance. The excess is added to your income and taxed at your marginal rate, and you report it through Self Assessment even if your scheme pays it.. It is added to your taxable income for the year and taxed at your marginal rate - so a higher-rate taxpayer pays 40% on the excess and an additional-rate taxpayer 45%. HMRC is clear this is not a penalty: it simply claws back tax relief you received on contributions you were not entitled to relieve.

You report it through Self AssessmentHMRC's system for reporting income and gains not taxed at source. The online return and payment deadline is 31 January after the tax year ends., in the pension savings tax charges section. In practice that means the HS345 helpsheet and boxes 10, 11 and 12 on the SA101 supplementary pages: box 10 is the charge itself, box 11 is any amount your scheme is paying, and box 12 is the scheme's Pension Scheme Tax Reference (PSTR). You file this even if your scheme pays the charge for you - a step people routinely miss.

Step 3 - Who pays the charge: you or your scheme?

If a charge remains, it gets paid one of two ways. You can pay it yourself, through your Self Assessment bill. Or you can ask your pension scheme to pay it out of your pension - a facility called Scheme PaysA way to have your pension scheme pay your annual allowance charge out of your benefits instead of from your own pocket. It is mandatory if you meet HMRC's conditions, otherwise voluntary at the scheme's discretion. - in exchange for a matching reduction in your future benefits. There are two versions, and the difference matters more than most pages let on.

Mandatory Scheme Pays is the one your scheme cannot refuse. All three of these must be true: your pension savings in that one scheme are more than the standard £60,000 annual allowance for the year; your charge for the year is more than £2,000; and you tell the scheme by 31 July of the year after the following tax year (so for a 2024/25 charge, by 31 July 2026). Once you elect you cannot change your mind, though you can adjust the amount if the charge changes.

Voluntary Scheme Pays is everything else. If you do not meet all three conditions your scheme may still agree to pay - but it does not have to, and many will not. There is no separate statutory deadline for voluntary Scheme Pays; the practical limit is that the charge has to reach HMRC by the 31 January Self Assessment deadline, so schemes set their own, earlier cut-off to leave time to process it. If the charge is £2,000 or less, mandatory Scheme Pays never applies - it is voluntary or nothing.

The £60,000 trap for tapered earners

Here is where tapered earners get caught. That first mandatory condition tests your input against the standard £60,000 - not against your reduced allowance. Take Priya, tapered down to a £20,000 allowance. She pays £40,000 into her scheme, so she has a £20,000 excess and a real charge of £20,000 × 45% = £9,000. But her £40,000 input is below £60,000, so she fails the first test. Her scheme does not have to pay, even though her charge is far more than £2,000. She is pushed onto voluntary Scheme Pays - at her scheme's discretion - or has to settle the charge from her own taxed income.

This is the single most important thing to know before you call your scheme. A large charge does not guarantee mandatory Scheme Pays. For most tapered savers - whose input sits between their reduced allowance and £60,000 - it is simply not available.

Whichever route applies, if the scheme pays it must reduce your benefits to match - that is the trade-off. It is worth checking they actually make the reduction: if they do not, HMRC can treat it as an unauthorised payment, which carries its own tax charge.

Reducing the charge in future years

Dealing with this year's charge is one thing; not repeating it is another. A few levers genuinely move the position, and each is worth raising with an adviser rather than acting on alone.

The blunt one is contributing less, or letting an employer redirect contributions above your allowance into salary instead. Timing helps too: a bonus or RSU (restricted stock units) vesting that tips your threshold income over £200,000 for a single year drags you into the taper for that year only, so deferring or spreading it can keep you out. Watch one trap here - salary sacrifice arrangements set up after 8 July 2015 are added back when HMRC works out your threshold income, so sacrificing your way under £200,000 may not work the way it looks.

One more thing to keep on your radar: if you have flexibly accessed a defined-contribution pension, the money purchase annual allowanceMoney Purchase Annual Allowance: A reduced £10,000 annual allowance for defined-contribution pensions, triggered once you flexibly access a pension (such as taking drawdown income). It cannot be reversed or carried forward. of £10,000 may apply, and carry forward cannot be used against money-purchase savings - which changes the whole calculation above. Our guide to pension lump sum tax covers which withdrawals trigger it.

None of this is financial advice - your own figures and your scheme's rules decide what is sensible. Use the calculator to model the numbers, and take advice before you act.

Primary sources: GOV.UK - Who must pay the pensions annual allowance tax charge; GOV.UK - Work out your reduced (tapered) annual allowance; HMRC PTM055100; HMRC PTM057100.