How the annual allowance charge is calculated — and who pays it

The annual allowance charge recovers the tax relief on pension saving above the allowance available for the year. It is not a fixed penalty. The chargeable excess is added to the member's taxable income and taxed at the marginal rate it falls in — 20%, 40% or 45% in England, Wales and Northern Ireland; for a Scottish taxpayer the Scottish rates from the basic rate upwards (20%, 21%, 42%, 45% or 48% for 2026/27 — the starter rate never applies to the charge; PTM056110, PTM056120). The charge runs through self-assessment, or, in some cases, the scheme settles it.

How the charge is worked

Start with the excess. Take the pension input amount for the year and subtract the available allowance — the current year's annual allowance (tapered if the member is a high earner), plus any carry-forward from the prior three years. What's left is the chargeable excess. That excess then stacks above the member's other income and is taxed at whatever rate(s) it reaches.

Take an additional-rate earner tapered to a £40,000 allowance, with £17,000 of carry-forward, so £57,000 of allowance against a £58,000 input (2025/26; the figures are the same for 2026/27).

The £1,000 excess sits in the member's additional-rate band, so the charge is £1,000 × 45% = £450. Had the same excess fallen in the higher-rate band it would be £400; in basic rate, £200. For a Scottish taxpayer it would be £420 in the higher-rate band and £480 at the top rate. The rate is the member's, not a flat figure — which is why the charge can only be computed once you know where the excess lands in their income.

Who actually pays it

Two routes. By default the member reports and pays the charge through their self-assessment return. But the scheme can pay it on the member's behalf, reducing their benefits accordingly — and in one case the member can require it to. Under PTM056410, mandatory scheme pays is available where the member's annual allowance charge for the year exceeds £2,000 and their pension input to that scheme exceeds the annual allowance in FA 2004 s.228 — the standard £60,000, with the tapered allowance and the MPAA expressly ignored for this input test. If the charge is calculated using the MPAA, the charge recalculated on the ordinary annual-allowance basis must also exceed £2,000. Even then the scheme must pay only the part of the charge that relates to its own input above £60,000, and only if the member elects for it. That qualification is the one that catches people: a member tapered to £10,000 can carry a real charge on a £30,000 input and still have no mandatory right, because £30,000 does not exceed £60,000. The member must give notice by the statutory deadline. Below those thresholds — as in the £450 case above — scheme pays is only available voluntarily, at the scheme's discretion, so that charge would ordinarily go through self-assessment.

The common error is to treat the charge as a flat percentage of the excess, or to forget carry-forward and over-state it. Both move the number — and the second can manufacture a charge that isn't due at all. Run the whole position on the pension annual allowance calculator — it shows the taper, carry-forward and the chargeable excess in one screen — or isolate the reach-back on the carry forward calculator. Signed in, the same inputs save to the client and print to a compliance-annex PDF with the full working; your logo and colours appear on Pro and Firm.

PTM056110 (rate of tax charge) · PTM056120 (terms used, incl. Scottish taxpayers) · PTM056410 (scheme pays) · PTM057100 (taper) · PTM055100 (carry-forward) · FA 2004 s.228