What Is the Threshold Income for Pension Annual Allowance Taper?

For the 2026/27 tax year, the threshold income for the pension annual allowance taper is £200,000. Stay at or below that figure and you keep the full £60,000 standard annual allowance, no matter how high your other income measures run. Cross it and the taper becomes possible, but not automatic: a second test on adjusted income decides whether your allowance actually gets cut.

What Counts as Threshold Income

Threshold income is defined in Section 228ZA of the Finance Act 2004 and begins with your net income for the tax year.¹ Net income is everything taxable: salary and bonuses, self-employment profits, rental income, savings interest, and dividends, after the deductions HMRC already applies when it calculates net income under the Income Tax Act 2007. Gift Aid donations are among those deductions, so they are already reflected in the starting figure.

From that starting number, two adjustments produce threshold income. Personal pension contributions where you received tax relief at source are deducted. Then any salary sacrifice or flexible remuneration arrangement entered into on or after 9 July 2015 is added back.¹ The date matters. A salary sacrifice arrangement set up before 9 July 2015 and left unchanged since stays out of the calculation. One created or amended after that date gets added back in full, so pension salary sacrifice cannot be used to duck below £200,000.

Taxable lump sum death benefits received from a registered pension scheme during the year are also stripped out. The taper is aimed at high ongoing earnings, not at people who happened to inherit a death benefit.

Working Out Your Threshold Income

HMRC’s guidance sets out the calculation in five steps.²

Start with net income: your total taxable income from all sources after the deductions allowed at Step 2 of the income tax calculation, including Gift Aid.
Deduct the gross amount of any personal pension contributions where tax relief was given at source. This covers personal pensions, stakeholder pensions, and some workplace schemes, but not employer contributions.
Deduct any pension lump sum death benefits that were subject to income tax during the year.
Add back any pension salary sacrifice arrangement entered into after 8 July 2015.
Add back any employment income given up under a flexible remuneration arrangement made after the same date.

What you are left with is your threshold income. If it comes in at £200,000 or below, you can stop. The taper does not apply, and your full £60,000 annual allowance is intact.²

Records You Will Need

Running the calculation accurately means pulling records from every income source. Your P60 confirms employment income and tax paid for the year.³ Taxable benefits in kind, such as a company car, private medical insurance, or an interest-free loan, appear on your P11D and feed into net income.

Beyond employment, you need dividend vouchers, interest statements from banks or building societies, and self-employment accounts where relevant. Keep records of Gift Aid donations because they affect net income. Your pension provider’s annual statement shows the gross amount of any personal contributions, including the tax relief added at source. If you have a salary sacrifice arrangement, your contract or payslip breakdown should confirm the sacrificed amount and when the arrangement started.

Pension input figures are the other piece, because you need them for the adjusted income test too. Scheme administrators must automatically send a pension savings statement if your inputs in that scheme exceed the standard annual allowance, and you can request one otherwise.⁴ The annual allowance applies to the combined total across every scheme you hold, not scheme by scheme.

What Happens Once You Cross £200,000

Threshold income above £200,000 opens the door to the taper. It does not, on its own, reduce your allowance. The taper only bites when adjusted income also exceeds £260,000.² Both tests must be failed. This is where people often assume they have lost allowance when they haven’t.

Once both limits are crossed, the allowance drops by £1 for every £2 of adjusted income above £260,000. At £280,000 of adjusted income, you are £20,000 over, so the allowance falls by £10,000 to £50,000. The reduction continues until it hits the floor of £10,000, which happens at £360,000 of adjusted income.² Above that, everyone with a tapered allowance sits on the same £10,000 minimum.

How Adjusted Income Differs

Adjusted income is a wider measure. You start with net income again, then add back employer pension contributions, the pension growth in any defined benefit scheme, and your own contributions made under net pay arrangements. Taxable lump sum death benefits come out, the same as for threshold income.²

The effect is that employer contributions and defined benefit growth push adjusted income well above threshold income. Someone earning £220,000 with £50,000 of employer pension contributions might have threshold income comfortably over £200,000 and adjusted income near £270,000, triggering a £5,000 cut to a £55,000 allowance. The pension savings your employer makes on your behalf can decide whether you keep the full allowance.

Carry Forward if You Breach the Allowance

If your pension savings exceed the allowance available for the current year, unused allowance from the previous three tax years can fill the gap. You must have been a member of a registered pension scheme during each year you draw unused allowance from.⁵

Use the current year first, then work backwards from the earliest unused year.⁶ No claim or special form is needed. If carry forward wipes out the excess, nothing needs reporting on the tax return. For people whose income moves back and forth across the taper boundary, prior-year headroom can absorb a bonus year that would otherwise cost them part of their allowance.

A Separate Regime: The Money Purchase Annual Allowance

One boundary worth knowing. If you have flexibly accessed a defined contribution pension, by taking an income drawdown payment or an uncrystallised funds pension lump sum, your allowance for further defined contribution savings drops to the money purchase annual allowance of £10,000, whatever your income. The taper does not reduce this further. Triggering the money purchase annual allowance is irreversible, and it operates independently of the threshold income test described above.

1
legislation.gov.uk. Finance Act 2004 – Section 228ZA
2
GOV.UK. Work Out Your Reduced (Tapered) Annual Allowance
3
GOV.UK. Your P45, P60 and P11D Form – Section: P60
4
GOV.UK. Information Pension Scheme Administrators Must Give to Members
5
GOV.UK. Check if You Have Unused Annual Allowances on Your Pension Savings
6
HM Revenue & Customs. HS345 Pension Savings – Tax Charges (2026)