Many high earning UK taxpayers are being caught out with regard to the annual allowance tax rules by unknowingly over-contributing to their pension – in many cases this is due to the effect of pension tapering significantly reducing their annual allowance. We always tell clients this is a “good” problem to have – because you are usually only in this position due to historic pay-rises putting you above the tapering threshold. We see this issue most often where employees have had a promotion with a large pay-increase, not giving them time to react or get used to the new tax rules.
At ESDG Accountancy, we specialise in guiding clients through complex tax matters, including how to calculate your tapered annual allowance and disclose pension-related charges to HM Revenue & Customs (HMRC). This article explains the pension annual allowance tax charge, when it applies, and the disclosure process to HMRC, helping you stay informed and prepared.
What is the Pension Annual Allowance?
The pension annual allowance is the maximum amount you can contribute to your pension schemes each tax year without incurring a tax charge. For the 2025/26 tax year, this stands at £60,000 (historically it has been lower however), including contributions from you, your employer, and any tax relief..
This limit applies to most people, but it can be lower in certain circumstances.
- Tapered Annual Allowance: If your total income (including pension contributions) exceeds £260,000, the allowance tapers down by £1 for every £2 over this threshold, reducing to a minimum of £10,000. Often the impact of tapering is overlooked and is the most common reason we see for why you may have exceeded your annual allowance.
- Carry Forward: You can carry forward unused allowance from the previous three tax years to offset excesses in the current year, provided you had a pension scheme in those years. However, if you have been unknowingly tapered for many years you may not have any spare allowance to utilise – this is most helpful for employees who have very recently had a large pay jump and have not been tapered for very long.
When Does the Annual Allowance Tax Charge Apply?
The tax charge kicks in if your total pension inputs exceed your available annual allowance (after carry forward). Pension inputs include all contributions by you and your employer across all your schemes. It is the responsibility of the taxpayer (i.e. you!) to be aware of if you have exceeded the annual allowance – despite many aspects of payroll and pensions being automated, it is rare to be informed of an overcontribution by your employer or HMRC.
You won’t face a charge if:
- Your inputs are below the allowance.
- Any excess is covered by carry forward from prior years – but you must have utilised your current years allowance in full before carry forward can be used.
If exceeded, the charge is applied to the excess at your marginal income tax rate (e.g., 20%, 40%, or 45%), effectively clawing back the tax relief on those contributions. For example, if you’re an additional-rate taxpayer and exceed your available annual allowance by £10,000, you could owe £4,500 in tax.
Your pension provider may send a statement if you exceed the un-tapered default allowance in their scheme, but you must check across all schemes yourself. Your pension scheme will also not know your total income to take into account if your annual allowance has been tapered due to your high income – so if your gross contributions do not exceed £60,000 then it is unlikely you will be notified.
Calculating the Pension Annual Allowance Tax Charge and “Scheme Pays”
To calculate the annual allowance charge:
- Sum all pension inputs for the tax year, ensuring you account for your own gross input + your employers.
- Subtract your annual allowance plus any carry forward – ensuring you take account of the tapering rules for each year.
- Apply your marginal tax rate to the remaining excess.
If the charge exceeds £2,000, you may opt for “scheme pays,” where your pension provider pays HMRC directly from your pension pot, and adjusts your benefits accordingly. This gives a favourable cashflow impact as it means you do not need spare funds outside of your pension to cover the charge. Whether you opt for “scheme pays” election or not, you’re still responsible for reporting it.
If you are completing a scheme pays election you will need to ensure this is declared on your tax return. You will also need to contact your pension scheme and complete their necessary forms – each scheme has their own variation of this process.
Keep records of carry forward usage, even if no charge is due, as HMRC may request them.
Disclosure to HMRC: Step-by-Step
We regularly handle cases for new clients who have been unaware of the tapering and annual allowance rules for a number of years.
The proper and best way to deal with this is to work with us to “notify” HMRC about your intention to make a disclosure as soon as you become aware of these rules.
Disclosure is mandatory if a charge is due, even if your provider handles payment via scheme pays.
Here’s how our process works disclose:
- We hold a consultation with you and discuss the options you have available to correct your tax affairs. Sometimes we can give you a rough indication of the tax years which are impact and a very rough indication of the tax charge which may be due.
- With your agreement, we issue a notification to HMRC about your intention to disclose underpaid tax.
- We then have up to 90 days to provide HMRC with the full follow-up information to disclose your tax liability. In this period we will perform tapered annual allowance calculations to calculate the full tax liability for each year affect. We will always work effectively to mitigate the tax charge where possible and ensure you are aware of how to correct the matter going forward in the current and future tax years.
- We apply for the appropriate penalty with HMRC – ensuring this is mitigated where possible and kept to a minimum.
- After we have explained the calculations and final calculate tax charge to you, and have your approval, we submit the disclosure to HMRC.
- HMRC will review the disclosure and may ask follow-up questions – we work with you to deal with these queries to bring the disclosure to a swift conclusion.
Common Pitfalls and Tips
- Multiple Schemes: Always aggregate inputs from all pensions.
- High Earners: Monitor tapering thresholds annually.
- Record-Keeping: Retain pension statements for at least six years.
- Incorrect Penalty Rate: it is important to self-determine the most appropriate penalty rate and challenge HMRC where appropriate.
- Number of years to disclose: the rules are complex and sometimes not all years where a charge exists need to be disclosed.
Failing to disclose or errors in your discloser can lead to a higher penalty rate, so accuracy is key.
How ESDG Accountancy Can Assist
We are Chartered Accountants who regularly completed tapered annual allowance calculations for our clients, as well as disclosers in the event our client was unaware of the annual allowance rules. We provide expert advice to mitigate your tax liability and penalty rate where possible, and can help prepare your self-assessment in future tax years to ensure any non-compliance issues are not repeated.
Send us an enquire below or to hello@esdgaccountancy.com to discuss your pension disclosure or tapered annual allowance query:
