Is the annual allowance charge a flat rate?

No. The chargeable excess is added to your taxable income and taxed at your marginal rate — 20%, 40% or 45% depending on the band it falls in. A £1,000 excess costs £200, £400 or £450 accordingly.

Does carry-forward reduce the charge?

Yes. Unused allowance carried forward from the previous three years is added to the current year’s allowance before the excess is worked out. Forgetting it over-states the charge, and can show a charge where none is due.

How do I pay the charge if the scheme doesn’t?

Through self-assessment — the charge is reported on your tax return for the relevant year and collected with your income tax. Scheme pays, where available, instead reduces your pension benefits to settle it.

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Part of the Pension annual allowance guide →

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

The excess over the available allowance is taxed at the member’s marginal rate, not a flat figure. How that’s computed, and the two routes to paying it.

Based on HMRC’s Pensions Tax Manual (PTM056110, PTM056410) and the engine’s PTM-EX-04 corpus example.

5 min read · Last reviewed 16 Jun 2026

— In short

The annual allowance charge is worked by adding the chargeable excess — pension input above the available allowance — to the member's taxable income and taxing it at their marginal rate, 20%, 40% or 45%, not a flat figure. By default the member settles it through self-assessment. The scheme must pay it where the year's charge exceeds £2,000 and the input to that scheme exceeds the FA 2004 s.228 annual allowance — the standard £60,000, with the taper and the MPAA ignored for that test.

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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%. 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 the engine's corpus row PTM-EX-04: 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.

Annual allowance charge — PTM-EX-04 · 2025/26 · additional-rate member

Pension input amount: £58,000
Tapered annual allowance: £40,000
Carry-forward available: £17,000
Total available allowance: £57,000
Chargeable excess: £1,000
Charge (45% marginal rate): £450

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. 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 it must. Under PTM056410, mandatory scheme pays applies 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 test. 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 branded compliance-annex PDF with the full working.

PTM056110 (rate of tax charge) · PTM056410 (scheme pays) · PTM057100 (taper) · PTM055100 (carry-forward) · FA 2004 s.228 · figures PTM-EX-04

Common questions

Is the annual allowance charge a flat rate?: No. The chargeable excess is added to your taxable income and taxed at your marginal rate — 20%, 40% or 45% depending on the band it falls in. A £1,000 excess costs £200, £400 or £450 accordingly.
Does carry-forward reduce the charge?: Yes. Unused allowance carried forward from the previous three years is added to the current year’s allowance before the excess is worked out. Forgetting it over-states the charge, and can show a charge where none is due.
When does the scheme pay the charge instead of me?: Mandatory scheme pays applies where your annual allowance charge for the year exceeds £2,000 and your input to that scheme exceeds the FA 2004 s.228 annual allowance — the standard £60,000, with the tapered allowance and the MPAA ignored for this test (PTM056410). Below that, a scheme can still pay voluntarily, at its discretion.
How do I pay the charge if the scheme doesn’t?: Through self-assessment — the charge is reported on your tax return for the relevant year and collected with your income tax. Scheme pays, where available, instead reduces your pension benefits to settle it.

Sources & grounding

Worked figures: engine corpus row PTM-EX-04 (app/calc-engine/corpus/ptm-corpus.json) — tapered AA £40,000 + carry-forward £17,000 = £57,000 total allowance, £58,000 input, £1,000 excess, £450 charge at the 45% additional rate. Re-used from the published carry-forward explainer (articles.tsx).
Mechanism: the charge adds the chargeable excess to the member’s taxable income for the year and taxes it at the marginal rate(s) it falls in (PTM056110, “rate of tax charge: general”).
Primary sources:PTM056110
Scheme-pays figures: HMRC PTM056410 (“scheme pays: general”). Mandatory scheme pays requires the year’s AA charge to exceed £2,000 AND the pension input to that scheme to exceed, verbatim, “the annual allowance amount in section 228 Finance Act 2004 (for example, for tax year 2016-17, this means exceeded £40,000 - note, the tapered annual allowance and/or money purchase annual allowance is ignored)”. So the second limb is tested against the STANDARD annual allowance (£60,000 from 2023/24), with the taper and the MPAA disregarded — a tapered member whose input exceeds their own £10,000 tapered allowance but not £60,000 has no mandatory right, only voluntary scheme pays. Standard AA £60,000 held in the engine config. Verified against gov.uk PTM056410, 2026-08-07.
Primary sources:PTM056410

For planning and illustration purposes only. Verify all inputs against source documents. This explainer does not constitute financial or tax advice.

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