This guide explains how both income tests work, how to calculate your tapered annual allowance, and what happens if your pension savings go over your available allowance.
Key Takeaways
What is the Tapered Annual Allowance?
The tapered annual allowance is a rule that can reduce how much higher earners can build up in their pensions each tax year before an annual allowance tax charge may apply. For 2026/27, the standard pension annual allowance is £60,000, but under the tapered annual allowance rules it can fall to as little as £10,000.
Whether the tapered annual allowance applies depends on two figures: threshold income and adjusted income. HMRC looks at more than just your salary, so taxable rental income, savings interest and dividends can also affect the calculation.
The current tapered annual allowance limits have applied since 6 April 2023. If your adjusted income is above £260,000 and your threshold income is over £200,000, your annual allowance may start to reduce.
Understanding how the tapered annual allowance works is especially important for higher earners, landlords and company directors with income from several sources, as these extra income streams can push them closer to the taper limits.
Who is Affected by The Tapered Annual Allowance in 2026/27?
The tapered annual allowance only applies if both of these limits are exceeded:
- threshold income is over £200,000
- adjusted income is over £260,000
If your threshold income is £200,000 or less, the taper does not apply.
Threshold income: the £200,000 test
Threshold income is broadly your taxable income, including salary, bonuses, business profits, rental income, savings interest and dividends, after certain pension adjustments.
If you give up salary for pension contributions under a relevant salary sacrifice arrangement made after 8 July 2015, HMRC adds that amount back when calculating threshold income. This means salary sacrifice cannot simply be used to bring your income below the £200,000 limit.
For example,
Imagine your salary is £210,000. You agree to give up £20,000 of salary and your employer pays that £20,000 into your pension instead. Your cash salary is now £190,000, but for the tapered annual allowance test HMRC may add the £20,000 back. That means your threshold income is still treated as £210,000, not £190,000.
Adjusted income: the £260,000 test
If your threshold income is above £200,000, you then need to check your adjusted income. This includes your income plus relevant pension contributions, including contributions made by your employer.
This can be particularly important for company directors, as a large employer pension contribution may push adjusted income above £260,000.
In simple terms:
£200,000 is the first test and £260,000 is the second. You need to be over both limits before the tapered annual allowance applies.
How to Calculate Tapered Annual Allowance
If your threshold income is over £200,000 and your adjusted income is over £260,000, your pension annual allowance starts to reduce.
For every £2 of adjusted income above £260,000, your £60,000 annual allowance falls by £1. For 2026/27, it cannot fall below £10,000.
Tapered annual allowance = £60,000 − ((adjusted income − £260,000) ÷ 2)
Step by Step Tapered Annual Allowance Calculation
Step 1 -Work out your net income
Start with your taxable income for the year and make the relevant adjustments under HMRC rules.
Step 2: Check your threshold income
If your threshold income is £200,000 or less, the tapered annual allowance does not apply.
Step 3: Check your adjusted income
If your threshold income is above £200,000, work out your adjusted income. This takes relevant pension savings into account, including employer pension contributions.
Step 4: Calculate the Reduction
Take the amount of adjusted income above £260,000 and divide it by two. This is the amount by which your £60,000 annual allowance is reduced.
Step 5: Apply the £10,000 minimum
Your tapered annual allowance cannot fall below £10,000. You reach this minimum at £360,000 of adjusted income, provided your threshold income is also above £200,000.
Adjusted income | Reduction From £60,000 | Tapered annual allowance |
|---|---|---|
£260,000 | £0 | £60,000 |
£280,000 | £10,000 | £50,000 |
£300,000 | £20,000 | £40,000 |
£320,000 | £30,000 | £30,000 |
£340,000 | £40,000 | £20,000 |
£360,000 or more | £50,000 maximum | £10,000 minimum |
Tapered Annual Allowance Worked Example: Rental Income
Priya is a consultant who also earns rental income. In 2026/27, she has:
- Salary: £220,000
- Bonus: £30,000
- Taxable rental income: £12,000
- Dividends: £8,000
- Gross personal pension contribution under relief at source: £20,000
- Employer pension contribution: £20,000
Step 1: Work out Priya’s net income
For this simplified example:
- £220,000 + £30,000 + £12,000 + £8,000 = £270,000
- Priya’s net income is £270,000.
Step 2: Check threshold income
Her £20,000 gross relief-at-source pension contribution is deducted:
- £270,000 − £20,000 = £250,000
- Her threshold income is therefore £250,000. As this is above the £200,000 limit, she must also check her adjusted income.
Step 3: Check adjusted income
In this simplified example, her £20,000 employer pension contribution brings adjusted income to:
- £270,000 + £20,000 = £290,000
- This is £30,000 above the £260,000 adjusted-income limit, so the tapered annual allowance applies.
Step 4: Calculate the tapered annual allowance
- £290,000 − £260,000 = £30,000 excess adjusted income
The allowance falls by £1 for every £2 of excess adjusted income:
- £30,000 ÷ 2 = £15,000 reduction
So Priya’s tapered annual allowance is:
- £60,000 − £15,000 = £45,000
Her total pension input in this example is £40,000:
- £20,000 personal contribution + £20,000 employer contribution = £40,000
That is £5,000 below her £45,000 tapered annual allowance, based on the assumptions used in this example.
Why does the Rental Income matter?
Priya’s £12,000 taxable rental income forms part of the income used in both taper calculations. For landlords and property investors with higher incomes, rental income can therefore make a difference to whether the tapered annual allowance applies.
This example is illustrative and assumes no other income, pension inputs or relevant adjustments, and that the money purchase annual allowance does not apply. Your actual position will depend on your individual circumstances.
Tapered Annual Allowance Example for a Company Director
Daniel runs his own limited company and receives:
- Salary: £50,000
- Dividends: £190,000
- Company pension contribution: £60,000
His threshold income is:
- £50,000 + £190,000 = £240,000
Because this is above the £200,000 limit, Daniel must also check his adjusted income.
Adding the £60,000 company pension contribution gives:
- £240,000 + £60,000 = £300,000 adjusted income
This is £40,000 above the £260,000 taper limit, so his annual allowance is reduced by half of that amount:
- £40,000 ÷ 2 = £20,000 reduction
- £60,000 − £20,000 = £40,000 tapered annual allowance
Daniel’s company has contributed £60,000, which is £20,000 above his tapered annual allowance before carry forward is considered. If he has unused annual allowance from the previous three tax years, it may cover some or all of this amount. If not, an annual allowance tax charge may arise.
Key Point
A director can have a relatively modest salary but still be affected by the tapered annual allowance because dividends count towards income and employer pension contributions can increase adjusted income.
This example is illustrative and assumes no other income, pension inputs or relevant adjustments. Your actual position will depend on your individual circumstances.
What is the Impact on UK Property Investors?
The tapered annual allowance can be easy for property investors to miss because HMRC looks at more than just salary. Taxable rental income and dividends can also increase the income used in the taper calculation.
For individual residential landlords, mortgage interest is generally not deducted when working out taxable rental profit. Instead, qualifying finance costs may receive a basic-rate tax reduction. This can mean your taxable rental profit is higher than the cash profit you actually keep, bringing you closer to the taper limits.
Property company owners also need to be careful. Dividends can increase the income used for both taper tests, while employer pension contributions can increase adjusted income.
Key point
If you receive significant rental income, dividends or company pension contributions, check both your threshold income and adjusted income before making a large pension contribution.
What Happens if you Exceed your Annual Allowance?
If your pension savings go above your available annual allowance after carry forward, you may face an annual allowance tax charge. The amount you pay depends on how much you exceed the allowance by and your overall taxable income.
You must report the charge through Self-Assessment, even if your pension scheme pays some or all of it on your behalf.
Can your pension scheme pay the charge?
In some cases, yes. This is known as scheme pays. You may be able to ask your pension scheme to pay the charge if:
- your annual allowance charge is more than £2,000; and
- your pension savings in that scheme are above the standard £60,000 annual allowance.
If the scheme pays the tax, your pension benefits will usually be reduced to reflect the amount paid. Some schemes may also offer voluntary scheme pays even where the statutory conditions are not met.
Key point
Exceeding your tapered annual allowance does not always mean a tax charge is due. Check whether you have unused allowance available to carry forward before working out any tax payable.
How does Carry Forward Affect the Tapered Annual Allowance?
Before assuming you have an annual allowance tax charge, check whether you can use carry forward. This lets you use eligible unused annual allowance from the previous three tax years. For 2026/27, that means looking back to 2023/24, 2024/25 and 2025/26.
You must have been a member of a registered pension scheme in the year the unused allowance comes from, and the oldest available allowance is used first. If the tapered annual allowance applied in an earlier year, you can only carry forward the unused part of that reduced allowance.
For example, if Daniel is £20,000 above his tapered annual allowance but has £25,000 of eligible unused allowance from an earlier year, carry forward could cover the full £20,000 and prevent an annual allowance charge on that excess.
Watch the MPAA (Money Purchase Annual Allowance)
If you have flexibly accessed a defined contribution pension and triggered the £10,000 Money Purchase Annual Allowance, carry forward cannot be used to increase that £10,000 limit for money purchase pension savings.
If you want to learn more about: Money Purchase Annual Allowance
Conclusion
The tapered annual allowance can be easy to overlook, especially if your income comes from several sources. Bonuses, dividends, rental income and employer pension contributions can all affect the calculation and reduce your available pension allowance.
If you are close to the limits, check your threshold income, adjusted income and any available carry forward before making a large pension contribution. For company directors and property investors, doing this early can help avoid an unexpected annual allowance tax charge.
Check your Tapered Annual Allowance before Contributing
At UK Property Accountants, we can review your threshold income and adjusted income, calculate your 2026/27 tapered annual allowance, and check any unused allowance available through carry forward.
Frequently Asked Questions
HMRC or your pension provider may not tell you automatically. You need to work out your threshold income and adjusted income for the tax year. For 2026/27, the taper can apply if threshold income is over £200,000 and adjusted income is over £260,000.
Usually not. Your pension provider can tell you how much has gone into your pension, but it may not know about other income such as salary, dividends or rental income. That means you normally need to check whether the tapered annual allowance applies yourself.
Generally, no. Capital gains are dealt with separately under Capital Gains Tax and do not normally form part of threshold or adjusted income. However, income from investments or property, such as rent, dividends or interest, can count.
Usually not. Income and gains inside an ISA are generally tax-free, so withdrawing money from an ISA does not normally increase your threshold or adjusted income. Different withdrawal rules can apply to Lifetime ISAs.
They can increase your adjusted income and may push it above the £260,000 limit. However, the tapered annual allowance only applies if your threshold income is also over £200,000.
Your tapered annual allowance is based on your income and pension figures for the whole tax year. A later bonus, dividend, rental income or employer pension contribution could therefore change your final position. If this happens, recalculate your allowance and check whether carry forward can cover any excess.
If you have an annual allowance charge to pay yourself, it is normally reported through Self-Assessment and paid by 31 January following the end of the tax year. For 2026/27, the normal deadline would be 31 January 2028.You still need to report the charge even if your pension scheme pays some or all of it for you.
Possibly, depending on your pension scheme and employment arrangements. Remember that the annual allowance can include employer contributions as well as your own, and defined benefit pension growth may also count. Before changing your contributions, work out your expected tapered annual allowance and check any available carry forward so you know how much pension saving you may have available.
- Statutory Residence Test (SRT) Explained for UK Tax Resident and Non-Resident - 14 October 2026
- Deed of Variation: IHT, CGT & SDLT on Inherited Property - 13 October 2026
- UK Budget 2026 and Iran War: What Landlords Need to Know - 12 October 2026
