Tapered Annual Allowance: A 2026/27 Guide for High Earners

The tapered annual allowance reduces the standard £60,000 pension annual allowance for high earners, cutting it to as little as £10,000 a year. In practice, that means if you're a high earner, the amount you can pay into a pension with tax relief can be well below £60,000.

For 2026/27 it applies once two income tests are both crossed - threshold income above £200,000 and adjusted income above £260,000 (we explain both below). From there, the allowance falls by £1 for every £2 of adjusted income over £260,000, down to the £10,000 floor at £360,000.

For the senior professionals we typically advise at NOVA Wealth - law firm and Big 4 partners, senior bankers, senior tech professionals with significant equity compensation - the taper is the default state of affairs, not the exception. This guide covers how it works, who it catches, how to calculate it, and the approaches we see clients use to manage it.

What is the tapered annual allowance?

The taper is how HMRC limits pension tax relief for the highest earners. Instead of everyone receiving the same £60,000 allowance, it withdraws part of that allowance above set income levels: the further your income runs over the thresholds, the less you can contribute while still receiving tax relief at your marginal rate.

It was introduced by the Finance Act 2015 (in force from 2016/17) and reformed in April 2023, when the thresholds were lifted from £150,000 and £110,000 to £260,000 and £200,000, and the minimum allowance was raised from £4,000 to £10,000.

So the figure that matters depends on where your income sits. Below the thresholds, it is the standard £60,000 for 2026/27 (HMRC Pensions Tax Manual, PTM057100) - contributions up to that amount, or 100% of relevant earnings if lower, receive relief. For high earners caught by the taper, it is smaller, sometimes much smaller: as little as £10,000 at the top end, one-sixth of the standard amount.

Who the tapered annual allowance applies to in 2026/27

Senior partners reaching £260,000 of adjusted income, senior bankers with substantial bonuses, and managing directors with large employer pension contributions are the people who most often meet the taper first. The rule has two triggers, and both must be met in the same tax year:

• Threshold income over £200,000, and

• Adjusted income over £260,000

The word "and" is the crux, and the single most misunderstood part of the rule. If either figure sits at or below its trigger, the taper does not apply, however high the other figure is.

This dual test is deliberate: it protects people whose pension input is large but whose take-home pay is not, typical of public-sector and generous defined-benefit schemes. Take a defined-benefit scheme member on a £190,000 salary whose pension accrual for the year - their Pension Input Amount, in HMRC's terminology - is valued at £80,000. Their adjusted income is £270,000, above the £260,000 trigger; but their threshold income stays broadly tied to the £190,000 salary, below the £200,000 trigger. So the taper does not apply, and the test has done its job, protecting a member whose total pension input is high but whose taxable income alone, comparatively, is not.

In practice, the "and" catches people both ways. Some assume they are caught because gross pay alone tops £200,000, not realising personal pension contributions pull their threshold income below the trigger. Others assume they are safe because salary is under £260,000, not realising employer contributions, deferred bonuses, and dividend income push their adjusted income over it.

Threshold income and adjusted income explained

This is where the rule gets genuinely complicated, and where most calculation errors come from. Both figures are defined precisely by HMRC, and the precision matters: the difference is small in everyday language but large enough in HMRC's definition to move someone in or out of the taper by tens of thousands of pounds.

What is threshold income?

Threshold income is your total taxable income for the year - salary, bonuses, dividends, savings interest, rental income and any other taxable income - minus the gross value of personal pension contributions made via relief-at-source. Gross is the operative word: a £10,000 net personal contribution attracts £2,500 of basic-rate relief at source, so £12,500 comes off threshold income. If threshold income is £200,000 or less, the taper cannot apply; this is the first test to run.

What is adjusted income?

Adjusted income is everything counted in threshold income, plus all pension contributions paid by you or your employer in the year: workplace defined-contribution contributions, salary-sacrifice contributions (employer-routed, even where notionally yours), and the deemed value of any defined-benefit accrual using HMRC's pension input amount method. If adjusted income exceeds £260,000, your standard £60,000 allowance reduces by £1 for every £2 above that figure.

What's included in threshold income vs adjusted income

Component	In threshold income?	In adjusted income?
Salary	Yes	Yes
Bonus	Yes (in year of receipt)	Yes (in year of receipt)
Dividends	Yes	Yes
Rental income	Yes	Yes
Savings interest	Yes	Yes
Your personal pension contributions (gross)	Deducted	Not deducted
Employer pension contributions	Not included	Added
DB scheme pension input amount	Not included	Added
Salary sacrifice pension (arrangements from 9 July 2015)	Generally added back	Added

Figures and components are illustrative; individual circumstances vary. Refer to HMRC PTM057100 for the precise definitions.

The three calculation traps we see most often:

• Forgetting employer pension contributions in adjusted income. It is natural to think of "your pension contributions" as the personal payments you make, but every contribution into your pension counts, including the employer's share, which can be substantial in professional-services firms and banks.

• Confusing net and gross on personal contributions. The deduction from threshold income is the gross figure, not what left your bank account: a £20,000 net contribution from a higher-rate taxpayer is a £25,000 gross deduction.

• Deferred bonuses landing in the wrong tax year. A deferred bonus counts in the year it vests and becomes taxable, not the year it was awarded - timing that can move someone in or out of the taper unexpectedly.

How the taper works: a worked example

Two illustrative examples, at income levels typical of NOVA's audience.

Income component	Senior partner, professional services firm	Managing director, US bank
Salary	£180,000	£250,000
Bonus (this tax year)	£140,000	£180,000
Dividends, savings interest, other	£0	£20,000
Personal pension contribution (gross)	£40,000	£0
Employer pension contribution	£20,000	£35,000
Threshold income	£280,000 (£320k less £40k personal contribution)	£450,000
Adjusted income	£340,000 (£280k + £40k personal + £20k employer)	£485,000
Adjusted income over £260,000	£80,000	£225,000
Reduction at £1 per £2	£40,000	£112,500
Standard allowance	£60,000	£60,000
Tapered annual allowance	£20,000	£10,000 (floor)

Figures are illustrative only and assume no other reliefs, carry forward of unused allowance from previous years, or scheme-specific factors. Actual calculations may differ based on individual circumstances.

The partner sits mid-range, with a £20,000 tapered allowance - a third of the standard. The managing director has adjusted income well above £360,000, so the allowance drops to the £10,000 floor; even doubling the bonus would not reduce it further, because £10,000 is the minimum the taper can produce however high income goes.

The full HMRC worked-example methodology is at PTM057200, worth reading alongside this guide for the technical detail.

What happens if you exceed your tapered annual allowance?

If your pension contributions for the year exceed your reduced allowance - and you have no unused allowance to carry forward from the previous three years - the excess is added to your taxable income and charged at your marginal rate via Self Assessment.

There is also an option called Scheme Pays, where the pension scheme settles the charge directly with HMRC and reduces your future benefits to cover it. The mandatory version applies where the annual allowance charge exceeds £2,000 and contributions in a single scheme exceed the standard annual allowance; some schemes also offer a voluntary version on different criteria. The details are in HMRC's Pensions Tax Manual.

The practical problem is timing. The tax bill falls due now, via Self Assessment, but the money is locked inside the pension until age 55 (rising to 57 from April 2028). For senior professionals with strong income but limited free cash flow, that mismatch can bite, which is why planning to stay within your allowance is almost always preferable to settling the charge after the fact.

Managing the tapered annual allowance: planning approaches

When the taper applies, pension saving does not stop being valuable, it just needs more deliberate planning. Common areas people may wish to consider when reviewing the taper’s impact include:

Carry forward of unused allowance

Unused allowance from the previous three tax years can typically be carried forward and added to your current-year allowance. For high earners this can be significant, though the unused allowance in those years may itself have been tapered, and you must have been a member of a registered pension scheme in each year. Our carry forward pension allowance guide sets this out in full.

Salary sacrifice and bonus sacrifice

Salary sacrifice converts part of your gross salary into an employer pension contribution. This matters for the taper test in two ways: the sacrificed amount comes out of your threshold income (you are no longer earning it as salary) and is added to your adjusted income as an employer contribution. The threshold-income reduction can be significant, because keeping threshold income below £200,000 can disapply the taper (and bonus sacrifice can work the same way). The taper’s interaction with salary sacrifice is complex, so individuals should calculate both threshold income and adjusted income accurately before assuming salary sacrifice will affect their tapered annual allowance position.

The £100k / 60% tax trap

Before the taper, professionals crossing £100,000 first meet the £100k / 60% tax trap: an effective 60% marginal rate between £100,000 and £125,140, caused by the withdrawal of the personal allowance. For income between £100,000 and £200,000, addressing this can matter as much as the taper. Depending on the individual's circumstances, pension contributions may affect both adjusted net income and threshold income calculations.

Tax-efficient alternatives when pension capacity is exhausted

Where the £10,000 tapered allowance is genuinely too small to absorb desired retirement saving, alternative wrappers come into play: ISAs (£20,000 per tax year), General Investment Accounts, and - for sophisticated investors with appropriate risk tolerance - Venture Capital Trusts (VCTs) and Enterprise Investment Scheme (EIS) investments. The right combination depends entirely on individual circumstances; this is one of the planning conversations NOVA's advisers have most often with clients in the taper range.

How NOVA helps with the tapered annual allowance

We have regular conversations with individuals who have a tapered annual allowance. We help our clients understand how to manage the tapering effectively, whether they might continue to contribute above the tapered allowance and pay the associated charges, or consider reducing their pension contributions and put the wealth to work elsewhere. 

If you would like to speak to a financial planner about your tapered allowance, we offer a 20 minute introductory call. There is no obligation and no charge.

How this article was prepared

This article was written by Ella Killen, Financial Adviser and Partner at NOVA Wealth. It cites HMRC's Pensions Tax Manual and GOV.UK guidance directly. The figures stated reflect rules in force for the 2026/27 UK tax year.

Capital at risk. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. We do not provide tax advice. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact a financial adviser. All figures quoted are for illustration purposes only. If you are unsure of your options you should seek professional financial advice or visit Pensionwise.gov.uk.

VCTs should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Past performance is not an indication of future performance. Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to or that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances. You should only subscribe to new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.

EIS investments should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than 3 years. Owing to the nature of their underlying assets, EIS investments are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to or that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances.

Issued on behalf of Nova. Nova is a trading name of Nova Wealth Ltd, which is authorised and regulated by the Financial Conduct Authority (FRN: 778951) and is a limited company registered in England & Wales (10739796).

Sources

• HMRC Pensions Tax Manual PTM057100 — Tapered annual allowance

• HMRC Pensions Tax Manual PTM057200 — Examples of calculating the tapered annual allowance

• GOV.UK — Work out your reduced (tapered) annual allowance

• HMRC Self Assessment guidance on pension annual allowance charge

About the author

Ella Killen, Financial Adviser. Ella is a Partner at NOVA Wealth, based in London. She works primarily with senior professionals and partners in professional services on retirement and pension planning, complex contribution and allowance planning, investment strategy, and personal tax planning - helping high earners whose pension allowances are restricted understand what they can still pay in, and when. Connect with Ella on LinkedIn.