Pensions and the Tapered Annual Allowance: Threshold Income and Adjusted Income Explained
— David Gregory
How the tapered annual allowance works in 2026/27: threshold income, adjusted income, the £200k and £260k limits, salary sacrifice and worked examples.
The tapered annual allowance reduces how much pension saving you can make each tax year before an annual allowance tax charge may apply, if your threshold income is over £200,000 and your adjusted income is over £260,000. For 2026/27 the standard annual allowance of £60,000 falls by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000. Salary sacrifice doesn't bring either figure down, but personal pension contributions do reduce threshold income, which can stop the taper applying altogether.
If your salary and bonus come to more than £200,000, the taper is one of the easiest pension rules to get caught out by. Your employer's contributions count towards it, your bonus can tip you into it late in the tax year, and the way you pay into your pension changes the result. This guide explains threshold income and adjusted income in plain English, shows how the taper is worked out, and walks through three examples.
You can check your own figures with our tapered annual allowance calculator, or download this guide as a PDF.
What is the tapered annual allowance?
The annual allowance measures how much pension saving you and your employer can make for you in a tax year before an annual allowance tax charge may arise. Contributions above the allowance are still allowed, and unused allowance from earlier years may cover the excess. For 2026/27 the standard annual allowance is £60,000.
For higher earners, that allowance can be tapered. The taper only applies if you are over both of these limits:
- Threshold income over £200,000
- Adjusted income over £260,000
If either figure is at or below its limit, you keep the full £60,000. If both are over, your allowance falls by £1 for every £2 of adjusted income above £260,000. The reduction is rounded down to the whole pound, and the allowance never falls below £10,000, which is reached at adjusted income of £360,000.
What is threshold income?
Threshold income is the first test. Broadly, it starts with your net income for tax purposes, before the personal allowance, personal savings allowance or dividend allowance, then deducts personal pension contributions made under relief at source and adds back pension salary sacrifice under arrangements made on or after 9 July 2015.
A simple way to work it out:
- Start with your salary, bonus and other taxable income such as savings interest, dividends and rental profit.
- Take off the gross amount of any personal pension contributions you make under relief at source, for example into a personal pension or SIPP.
- Add back any salary or bonus you have sacrificed for pension contributions under an arrangement made on or after 9 July 2015, which covers most schemes in place today.
Employer pension contributions are not included in threshold income. Sacrificed pay is added back so that salary sacrifice can't be used to get under the £200,000 limit.
What is adjusted income?
Adjusted income is the second test, and it sets the size of the taper. For defined contribution pensions, it broadly starts with your net income and adds employer pension contributions, including any salary or bonus you have sacrificed. Employee contributions made under a net pay arrangement are also added back.
Personal contributions made under relief at source are not taken off adjusted income. So in practice, adjusted income is close to your total pay package including pension, whichever way the pension contributions are made. For defined benefit pensions, the calculation uses the value of your pension build-up rather than your employer's cash contributions.
HMRC's full definitions of threshold income and adjusted income include some further adjustments, but the steps above cover most employees.
What counts towards each test
| Item | Threshold income | Adjusted income |
|---|---|---|
| Salary and bonus paid to you | Counts | Counts |
| Salary or bonus given up through salary sacrifice | Added back | Counts |
| Employer pension contributions (defined contribution schemes) | Not included | Counts |
| Your personal pension contributions (gross, relief at source) | Taken off | Not taken off |
| Savings interest, dividends and rental profit | Counts | Counts |
How the tapered annual allowance is calculated
Once you know both figures, the calculation is:
Tapered annual allowance = £60,000 less half of (adjusted income less £260,000), with a minimum of £10,000
| Adjusted income | Annual allowance (if threshold income is over £200,000) |
|---|---|
| £260,000 or less | £60,000 |
| £280,000 | £50,000 |
| £300,000 | £40,000 |
| £320,000 | £30,000 |
| £340,000 | £20,000 |
| £360,000 or more | £10,000 |
Why salary sacrifice doesn't avoid the taper
Salary sacrifice and bonus sacrifice are still useful, because they save income tax and National Insurance on the way in. However, they reduce neither threshold income nor adjusted income. The sacrificed amount is added back to threshold income and counted as an employer contribution in adjusted income.
That means sacrificing a bonus into your pension can push your total pension savings over a tapered allowance without bringing the allowance back up.
How personal pension contributions can help
Pension contributions you pay yourself into a personal pension or SIPP, under relief at source, are taken off threshold income. If they bring threshold income down to £200,000 or less, the taper doesn't apply and you keep the full £60,000 allowance, however high your adjusted income is.
For every £80 you pay in, the pension provider adds £20 of basic rate tax relief. Higher and additional rate taxpayers can claim the rest back through self assessment or by contacting HMRC. Subject to eligibility, including the normal under 75 age condition, tax relief on personal contributions is limited to the higher of £3,600 gross or 100% of your relevant UK earnings for the year. Savings interest, dividends and rental income are not relevant UK earnings for this purpose.
At higher income levels, a contribution large enough to remove the taper will often take your total pension savings above £60,000, so it usually needs to be combined with carry forward.
Carry forward
Carry forward lets you use unused annual allowance from the previous three tax years, which for 2026/27 means 2023/24, 2024/25 and 2025/26. You have to use this year's allowance first, and you must have been a member of a UK registered pension scheme in each year you carry forward from. If your allowance was tapered in an earlier year, it is the tapered figure that counts. Unused allowance is used from the earliest year first, and carry forward can't be used to increase the £10,000 money purchase annual allowance.
Three worked examples
All three examples assume a workplace scheme where the employee sacrifices 5% of salary and the employer pays 13%, both worked out on salary up to £100,000. That's £18,000 a year going in through work. Figures are for 2026/27 and assume no other income or pension savings.
Example 1: £150,000 salary and £100,000 bonus
- Threshold income: £245,000 taxable pay plus £5,000 sacrifice added back = £250,000
- Adjusted income: £245,000 plus £18,000 employer contributions = £263,000
- Taper reduction: (£263,000 less £260,000) ÷ 2 = £1,500
- Annual allowance: £58,500, leaving £40,500 of room after the £18,000 paid in through work
Example 2: £220,000 salary with a £50,000 bonus sacrificed
- Threshold income: £215,000 taxable pay plus £55,000 sacrifice added back = £270,000
- Adjusted income: £215,000 plus £68,000 employer contributions = £283,000
- Annual allowance: £60,000 less £11,500 = £48,500
- Total paid in: £68,000, which is £19,500 over the allowance
On these assumptions, sacrificing the £50,000 bonus reduces income tax by £22,500 and employee National Insurance by £1,000, before allowing for any annual allowance charge. Without enough carry forward, the £19,500 excess would lead to an annual allowance charge of £8,775 at 45%, reducing the overall tax benefit.
Example 3: the same package with a personal contribution instead
- The bonus is taken as pay and a £70,000 gross personal contribution is made
- Threshold income: £265,000 plus £5,000 added back, less £70,000 = £200,000, so the taper doesn't apply
- Annual allowance: £60,000
- Total paid in: £88,000, so £28,000 needs to come from carry forward
With £28,000 of unused allowance from earlier years, the whole £88,000 can go in without an annual allowance charge. A £50,000 personal contribution would not have been enough, as threshold income would still be £220,000. This doesn't mean personal contributions are always better than salary sacrifice; the right mix depends on the amounts, your carry forward, National Insurance savings and your own tax position.
The annual allowance charge
If your pension savings go over your available allowance, including any carry forward, the excess is added to your income and taxed at your marginal rate through self assessment. In some cases your pension scheme can pay the charge from your pension instead, known as scheme pays.
Things to check before the end of the tax year
- Your bonus: the tests use your income for the whole tax year, so finalise contributions once you know your bonus, and make sure they're received by 5 April 2027
- Bonus sacrifice normally has to be agreed before you become entitled to the bonus
- All your pension savings count, including other workplace schemes and any defined benefit build-up
- If you've already started drawing a pension flexibly, a lower £10,000 money purchase annual allowance may apply
- From 6 April 2029, salary sacrificed for pension contributions above £2,000 a year will generally become subject to employee and employer National Insurance. Ordinary employer pension contributions remain exempt
Frequently asked questions
What is the threshold income limit for the tapered annual allowance?
For 2026/27 the threshold income limit is £200,000. If your threshold income is £200,000 or less, the taper does not apply, whatever your adjusted income.
What is the adjusted income limit?
The adjusted income limit is £260,000. Your allowance only starts to reduce once adjusted income is above £260,000 and threshold income is above £200,000.
Does salary sacrifice reduce threshold income?
No, not for arrangements made on or after 9 July 2015. Sacrificed salary or bonus is added back to threshold income and counted as an employer contribution in adjusted income.
Do personal pension contributions reduce adjusted income?
No. Personal contributions reduce threshold income, but not adjusted income.
Can I reduce my threshold income by paying into a SIPP?
Yes. Personal contributions made under relief at source reduce threshold income by the gross amount contributed. If this brings threshold income to £200,000 or less, the tapered annual allowance will not apply. However, the contribution still counts towards your annual allowance, and carry forward may be needed to avoid an annual allowance charge.
What is the minimum tapered annual allowance?
The minimum is £10,000, reached when adjusted income is £360,000 or more.
Can I use carry forward if my allowance is tapered?
Yes, you can carry forward unused allowance from the previous three tax years once this year's allowance is used up, as long as you were a member of a registered pension scheme in those years. Any taper in those earlier years reduces what you can carry forward.
Check your own figures
Use our tapered annual allowance calculator to work out your threshold income, adjusted income and allowance for 2026/27, or download the PDF guide. If you think the taper may apply to you, or you'd like help setting up a personal pension, we can set up and manage a SIPP for you and work through your numbers with you. Get in touch.
This guide is for general information only and is not personal advice. It uses 2026/27 rules for taxpayers in England, Wales and Northern Ireland; Scottish income tax rates differ. The examples are illustrative and assume an example workplace scheme. The tax treatment of pension contributions depends on individual circumstances and may change. The value of pension investments can fall as well as rise and you may get back less than you invest.