Pension Tapering Explained: Why a Strong Year Can Shrink Your Pension Allowance
Updated: Sep 29
By Rob Bell, Chartered Financial Planner, Finova Money
Last reviewed September 2026. Figures apply to the 2026/27 tax year.
Most high earners assume their pension allowance is a settled number, £60,000 a year, sitting there ready to be used. For a large group of people, it is not. A rule called the tapered annual allowance can cut that figure to as little as £10,000, and the years it bites hardest are usually the good ones. The year a big bonus lands. The year a tranche of shares vests. The year the business has its best trading period in a decade. The reward for a strong year can be a smaller pension allowance, and most people only discover this after the money has already gone in.
If that sounds unfair, or at least counterintuitive, you are not alone. The taper is one of the least understood rules in the pension system, partly because the calculation behind it does not work the way people expect. Here is how it actually functions, who it tends to catch, and where the room for sensible planning sits.
What is the tapered annual allowance?
The annual allowance is the total amount that can go into your pensions in a single tax year before a tax charge applies. That includes your own contributions, anything your employer pays in, and, for those in defined benefit schemes, the measured growth in your pension over the year. For the 2026/27 tax year the standard annual allowance is £60,000.
The taper reduces that allowance for higher earners. Once your income passes a certain point, the allowance falls by £1 for every £2 above the line, down to a floor of £10,000. The reduction reaches that floor when adjusted income hits £360,000, at which point the allowance stops falling. So depending on your year, your real allowance could be anywhere between £60,000 and £10,000, and it can move around from one year to the next.
Why does tapering use two income tests?
This is the part that trips people up. The taper does not look at one income figure, it looks at two, and both have to be exceeded before the allowance is touched at all.
The first is threshold income, broadly your total taxable income from all sources, less the gross amount of any personal pension contributions you make, with any salary or bonus sacrificed under a salary sacrifice arrangements set up after 8 July 2015 added back in. The test line here is £200,000. The second is adjusted income, which starts from a similar place but adds back pension contributions, including anything your employer pays in. The test line here is £260,000. The taper only applies if you are over £200,000 on the first measure and over £260,000 on the second. Both measures count all of your taxable income, not just salary, so savings interest, dividends, rental income and taxable benefits in kind all feed in.
That second condition matters more than it first appears. If your threshold income is £200,000 or below, the taper cannot apply to you, no matter how high your adjusted income climbs. The two tests were designed to catch genuinely high earners while stopping people from sidestepping the rule simply by routing large sums through a pension. For planning purposes, though, that £200,000 threshold line is where most of the useful conversation begins, because staying below it switches the taper off entirely.
How can a bonus or share vest trigger the taper?
Salary, bonus and vesting shares are all taxed as employment income, usually through PAYE, though some equity awards are settled through self assessment instead, and all of them feed straight into these income tests. For anyone with equity compensation, this is where the taper tends to bite without warning.
Restricted stock units (RSUs) are the clearest example. When RSUs vest, their value is taxed as earnings in that year, so a single vest can add tens of thousands to your income in one go, on top of a salary and bonus that may already be sizeable.
Employee Stock Purchase Plans (ESPPs) can have a similar effect and are commonly misunderstood. Discount and look-back features can mean shares are bought well below their market price, and for UK taxpayers that gap is generally taxed as employment income at purchase, even if the shares are kept. It is the gain, rather than the full value of the shares, that counts towards both income tests, and after a strong run in the share price it can be larger than expected. UK schemes such as Sharesave work differently and usually avoid this income tax charge.
Take someone earning £120,000, with an annual bonus of £80,000 and a further £10,000 of investment income from savings and dividends. That already puts their threshold income at £210,000, over the first line. In an ordinary year, though, the taper still does not apply, because their adjusted income, once you add a £20,000 employer pension contribution, is only £230,000, comfortably under the second line at £260,000. Both lines have to be crossed, and here only one is.
Now a £50,000 tranche of RSUs vests. Taxed as employment income, it lifts threshold income to £260,000 and adjusted income to £280,000. Both lines are crossed, and the taper reduces their allowance by £1 for every £2 above £260,000, which comes to £10,000, leaving an allowance of £50,000 for that year.
In practice, the people we see caught by this are rarely the ones who set out to make a large contribution. More often they had a strong year they did not fully register at the time, learned about the taper the following spring when the paperwork caught up with them, and found the moment to do anything about it had already passed.
One distinction matters for anyone with equity compensation. Vesting RSUs are taxed as employment income at their value on the day they vest, and for a UK-based employee that value normally counts towards both income tests, the whole gross award rather than only the shares left once tax has been withheld.
There can be exceptions, though. Someone who spent part of the vesting period working outside the UK, for example, may find that not all of the award falls within the UK tests, which is worth checking with a specialist tax adviser rather than assuming either way.
Capital gains do not count, so selling a property or a holding of shares at a profit sits outside these income measures, even though it can feel like a windfall in the same way a vest does. Qualifying Enterprise Management Incentive (EMI) options usually fall on the capital gains side as well, taxed as a gain when the shares are sold rather than as income, which generally keeps them outside the taper calculation. For anyone weighing up how they are paid, that is a meaningful difference from RSUs.
Can a personal contribution switch the taper off?
Sometimes, and this is the single most useful thing to understand about the taper. A personal pension contribution reduces threshold income, though it does not reduce adjusted income, so the lever works entirely through the first gate. If a contribution brings threshold income down to £200,000 or below, the taper switches off and the full £60,000 allowance returns, even when adjusted income is still well over £260,000.
In the example above, threshold income sits at £260,000. A £60,000 gross personal contribution brings it back to £200,000, at which point the taper no longer applies, as the right-hand side of the chart shows. The catch is that the contribution is real money going into a pension, and it counts towards the very allowance it is helping to restore. With a £20,000 employer contribution already in, total input reaches £80,000 against a restored £60,000 allowance, so carry forward from earlier years is usually what makes the numbers work without a charge.
This lever has a reach, and it runs out. The further above £200,000 threshold income sits, the larger the contribution needed to pull it back, and beyond a certain point the required contribution is simply too big to be realistic.
Someone with £500,000 of threshold income and £540,000 of adjusted income is already at the £10,000 floor, and a £60,000 contribution, large as it is, only brings threshold income to £440,000. Both gates stay firmly crossed and the allowance stays at £10,000. At that level the planning shifts, away from trying to escape the taper and towards using the £10,000 well and asking whether a pension is even the right home for the surplus.
How does the taper affect how business owners pay themselves?
Business owners face the same rules, with one important advantage: they often have a say over how they are rewarded, and that control is where the taper can be managed.
Salary and dividends both count as income for the tests, so drawing more of either moves you towards the lines. Employer pension contributions made by the company behave differently. They do not count towards threshold income at all, though they do count towards adjusted income and towards the annual allowance itself. That makes the mix matter. The same total reward, split differently between salary, dividends and employer contributions, can leave threshold and adjusted income in very different places, and with them the size of the allowance. The personal contribution lever described above works here too, and an owner drawing income flexibly often has more room to use it than a salaried employee does as they can control how their remuneration is taken.
One common assumption is worth correcting. Many owners believe they can sacrifice salary (not to be confused with an actual employer contribution), into a pension to slip under the threshold. Salary sacrifice arrangements set up after 8 July 2015 are added back when threshold income is calculated, so that route generally does not work the way people hope. It is the kind of detail that looks like a loophole and turns out to be closed.
How do carry forward and contributions change the picture?
Because the taper is a restriction rather than a benefit, the value lies in how well it is managed, and there are a few genuine levers.
Carry forward is the most useful one for a spike year. You can carry forward unused annual allowance from the previous three tax years, provided you were a member of a registered pension scheme in those years and you use the current year’s allowance first. The person tipped into a £50,000 allowance by their RSU vest may still be able to contribute more than that by drawing on allowance they did not use in earlier, quieter years. For someone whose income is lumpy by nature, whether that is a tech professional with irregular vests or an owner with a standout trading year, carry forward is often the tool that does the heavy lifting.
None of these levers are free. Personal contributions broadly attract tax relief only up to your relevant earnings, the annual allowance still caps the total that can go in, and the sums involved are large enough that small errors are expensive. They are mechanics that reward being planned in advance, and they seldom rescue anyone who reaches for them in a January panic.
There is a balance to hold here too. The instinct, on learning the allowance has shrunk, is often to stop contributing. That is rarely the right conclusion. Under-funding a pension across a working life carries its own cost in lost tax relief and lost compounding, and over a career that cost usually dwarfs a one-off annual allowance charge. The taper narrows the door in certain years. It does not make the room behind it any less worth entering.
What happens if you exceed your tapered allowance?
If your total pension input for the year comes in above your available allowance, including any carry forward, the excess is caught by the annual allowance charge.
In practice the excess is added to your taxable income and taxed at your marginal rate, which removes the tax relief you would otherwise have had on that portion.
In some situations the pension scheme can pay the charge on your behalf out of your pot, an option known as scheme pays, which can help with the cash flow even though it reduces the eventual pension. The charge is not a fine and it does not undo the value of everything you have contributed. It simply strips the relief off the part that went over the line.
Where does advice earn its keep on tapering?
The calculation looks tidy on paper and rarely is in real life. Threshold and adjusted income both carry specific add-backs and deductions that differ from an ordinary income tax computation. Defined benefit pension growth is measured in a way that regularly surprises people. The interaction between the taper, carry forward, relevant earnings and the money purchase annual allowance can change the answer entirely once your full position is on the table. A figure that looks like a problem in isolation sometimes disappears when the whole picture is assembled, and sometimes the reverse. HMRC’s guidance on working out your tapered annual allowance sets out the full calculation, and the MoneyHelper explainer covers the same ground in plainer terms.
This article sets out how the rules work and is general information rather than personal advice. What the taper means for you depends on your specific circumstances, and getting the timing and structure right, particularly around a known bonus, a vesting schedule or a strong company year, is usually where a conversation with a financial planner or accountant pays for itself.
If you would like to talk any of this through, you can send us a message or book an initial call with us and we can discuss your situation together.
Common questions about pension tapering
What is the tapered annual allowance for the 2026/27 tax year?
For 2026/27 the standard annual allowance is £60,000. It reduces by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000, and only where threshold income is also above £200,000.
What is the difference between threshold income and adjusted income?
Threshold income is broadly your total taxable income from all sources, less the gross amount of any personal pension contributions you make, with any salary or bonus sacrificed under a salary sacrifice arrangements, set up after 8 July 2015, added back in and tested against £200,000. Adjusted income adds gross personal pension contributions back in, including employer contributions, and is tested against £260,000. The taper applies only when both figures are exceeded.
Do RSUs count towards the tapered annual allowance income tests?
Yes. Vesting RSUs are taxed as employment income, so for a UK-based employee their value normally counts towards both threshold and adjusted income in the year they vest, which is why a large vest can trigger the taper.
There can be exceptions, such as awards partly earned while working outside the UK, which are worth checking with a tax adviser. Qualifying Enterprise Management Incentive (EMI) options are usually taxed as capital gains instead and generally fall outside these tests.
Can a personal pension contribution stop the taper?
A personal contribution reduces threshold income, though it does not reduce adjusted income. If it brings threshold income to £200,000 or below, the taper switches off and the full £60,000 allowance is restored. Where income is very high, the contribution needed can be too large for this to work.
What is the minimum tapered annual allowance?
£10,000. This floor is reached once adjusted income reaches £360,000, and tapering cannot reduce the allowance below it.
Does salary sacrifice reduce threshold income?
Not for arrangements set up after 8 July 2015. The sacrificed amount is added back when threshold income is calculated, so salary sacrifice generally cannot be used to drop below the £200,000 threshold.
Important information. This article is for general information only and does not constitute personal financial, tax or investment advice, and it should not be relied on or acted on without advice tailored to your own circumstances. Tax rules, allowances, thresholds and reliefs, including the tapered annual allowance, the standard annual allowance and carry forward, depend on your individual circumstances and can change in future. The figures quoted apply to the 2026/27 tax year. The value of pensions and the investments held within them can fall as well as rise, and you may get back less than you put in. Pensions are not normally accessible until age 55 (increasing to age 57 from April 2028). The value of shares and equity awards such as RSUs can fall too, and their worth on any future vesting date is not guaranteed. Pension funding decisions can be complex, and contributing above your available allowance can give rise to a tax charge, so the cost of getting it wrong can be significant. Some of the areas touched on here, including how the rules apply to internationally mobile employees and to the way business owners draw income, can need specialist input, and you should speak to a financial planner and, where appropriate, a tax adviser or accountant before taking any action. This article is correct at the time of writing and is subject to change.