Exceeding the annual allowance (AA) is not automatically a disaster, but it does generate a tax charge that must be calculated correctly, reported to HMRC, and either paid out of pocket or funded through a formal arrangement with your pension scheme. Many people who trigger a charge — particularly high-earning public sector employees — are unaware of the mechanism until they receive an annual benefit statement showing a large pension input amount.
This guide walks through the full calculation process, explains Scheme Pays in detail, and sets out the self-assessment reporting requirements.
Step 1: Calculate Your Total Pension Input Amount
The pension input amount (PIA) is the measure of how much pension saving occurred in a tax year across all your registered pension schemes. There are two types of PIA, depending on the type of scheme.
Money Purchase (DC) Schemes
For defined contribution schemes — including SIPPs, group personal pensions, and master trusts — the PIA is simply the total of all contributions flowing into the scheme during the pension input period (6 April to 5 April), from all sources:
- Member contributions (including salary sacrifice)
- Employer contributions
- Third-party contributions (e.g. a parent contributing to an adult child's SIPP)
- Relief at source tax top-ups from HMRC
Note: investment returns within the scheme are not counted. Only contributions count.
Defined Benefit (DB) Schemes
For DB schemes, the PIA is calculated using the 16:1 factor mandated by HMRC. The formula is:
PIA = (Closing accrued pension × 16) − (Opening accrued pension × 16 × CPI revaluation factor)
The CPI revaluation factor accounts for the fact that the opening pension rises with inflation each year inside the scheme. For the 2025/26 tax year, the CPI factor would reflect September 2024 CPI (the rate used for revaluing DB pensions under most public sector schemes).
Worked example (NHS consultant):
- Opening accrued pension (April 2025): £62,500/year
- CPI revaluation factor: 1.027 (2.7% CPI)
- Closing accrued pension (April 2026): £67,000/year
PIA = (£67,000 × 16) − (£62,500 × 1.027 × 16)
PIA = £1,072,000 − £1,027,000
PIA = £45,000
Where the member also has DC pension savings (e.g. a SIPP funded from private practice income), the DC and DB PIAs are added together.
Step 2: Establish Your Annual Allowance for the Year
The standard annual allowance for 2026/27 is £60,000.
However, two reductions may apply:
Tapered Annual Allowance (TAA): If your "threshold income" exceeds £200,000 AND your "adjusted income" (including all pension contributions) exceeds £260,000, your AA is reduced by £1 for every £2 of adjusted income above £260,000. The minimum tapered AA is £10,000.
Money Purchase Annual Allowance (MPAA): If you have flexibly accessed a DC pension (e.g. entered flexi-access drawdown or taken an uncrystallised funds pension lump sum), your DC contribution limit drops to £10,000. You cannot use carry forward to increase this.
If neither reduction applies, your AA for the year is £60,000.
Step 3: Apply Carry Forward
Before calculating whether you have exceeded your AA, you can add unused AA from the previous three tax years. Carry forward is available provided:
- You were a member of at least one registered pension scheme in each of those years
- Your carry forward from each year is the AA for that year minus your PIA for that year (minimum zero — you cannot carry forward a negative figure)
- You cannot use carry forward if the MPAA has been triggered (for DC contributions)
Example with carry forward:
| Tax Year | AA | PIA | Unused AA |
|---|---|---|---|
| 2022/23 | £40,000 | £32,000 | £8,000 |
| 2023/24 | £60,000 | £45,000 | £15,000 |
| 2024/25 | £60,000 | £52,000 | £8,000 |
| 2025/26 | £60,000 | £90,000 | — |
Total carry forward available: £8,000 + £15,000 + £8,000 = £31,000
Effective AA for 2025/26: £60,000 + £31,000 = £91,000
Excess: £90,000 − £91,000 = £0 — no charge due
In this example, carry forward eliminates the charge entirely. Without carry forward, the charge would have been on £30,000 of excess.
Step 4: Calculate the Annual Allowance Charge
If, after applying carry forward, your total PIA still exceeds your AA, the excess is added to your income and taxed at your marginal rate for the year.
Worked example:
- Total PIA (2025/26): £100,000
- Annual allowance (including carry forward): £75,000
- Excess: £25,000
- Member's marginal income tax rate: 45% (additional rate taxpayer)
- Annual Allowance Charge: £11,250
The charge is payable to HMRC via self-assessment. It is due by 31 January following the end of the tax year — the same deadline as the balancing payment on account for income tax.
Where the member's income spans multiple rate bands, the excess pension savings are treated as the top slice of income and taxed at the highest marginal rate applicable.
Step 5: Decide Whether to Use Scheme Pays
Rather than paying the AA charge from personal funds, eligible members can elect for the pension scheme to pay the charge on their behalf. This is called Scheme Pays. The scheme then deducts a corresponding reduction from the member's pension entitlement (in a DB scheme) or fund value (in a DC scheme).
Voluntary Scheme Pays
Voluntary Scheme Pays is available where:
- The AA charge is at least £1 (any positive charge), AND
- Total pension savings in the scheme where the election is being made exceed the AA for the year (i.e. the excess of £1 or more arose from that scheme)
- The election is made by 31 July in the year following the end of the tax year (i.e. 31 July 2027 for a 2025/26 charge)
Note: the 31 July deadline for voluntary Scheme Pays is strict. A late election is not accepted.
Mandatory Scheme Pays
Mandatory Scheme Pays is available where:
- The AA charge for the tax year exceeds £2,000, AND
- The individual's pension savings in the relevant scheme also exceed the scheme's AA (which is the full AA, not the tapered amount)
- The member formally requests that the scheme pays
Where both conditions are met, the scheme is legally required to pay the AA charge and adjust the member's benefits accordingly.
DB Scheme Pays Adjustment
In a DB scheme (such as the NHS Pension Scheme or Local Government Pension Scheme), the scheme calculates an actuarial reduction to the member's benefit to offset the cost of paying the AA charge. The reduction reflects the scheme's own actuarial factors and is applied at the time benefits are drawn. This is not always the most cost-effective option — it depends on how long the member lives and draws benefits.
DC Scheme Pays Adjustment
In a DC scheme (SIPP or group personal pension), the scheme pays the AA charge and deducts the equivalent from the fund value. This is a straightforward cash reduction.
Step 6: Report on Self-Assessment
The annual allowance charge must be reported on the self-assessment tax return (SA100 / SA101 — Additional Information pages), even if the charge is being met entirely through Scheme Pays.
Key boxes on the return:
- Box 10 on SA101: Total pension savings exceeding the annual allowance (the excess amount)
- Box 11 on SA101: Annual Allowance charge due (the tax amount)
- Box 12 on SA101: Amount to be paid through Scheme Pays
- Box 13 on SA101: Amount due from the member directly
If you have notified your scheme of a Scheme Pays election, include the scheme reference number in the return. HMRC uses this to match the election between the scheme's records and your SA return.
Deadline reminder:
- Return filing deadline: 31 January following the tax year end
- SA payment deadline: same, 31 January
- Voluntary Scheme Pays election deadline: 31 July following the tax year end
Interest and Penalties
If the AA charge is underpaid or undisclosed, HMRC charges interest from 31 January following the tax year. The HMRC late payment interest rate (as of 2026) is the Bank of England base rate plus 4% (raised from base plus 2.5% on 6 April 2025), calculated daily.
Where the under-declaration is found on enquiry, penalties of up to 100% of the unpaid tax (or 200% for offshore matters) can apply. Most people trigger AA charges inadvertently rather than deliberately, and HMRC generally accepts that genuine errors carry lower penalties — but disclosure must be prompt.
NHS Scheme Pays: Specific Points
The NHS Pension Scheme has its own Scheme Pays election form (NHS Pensions: Scheme Pays election form, available via the NHS Pensions member portal). NHS members should note:
- Elections must be submitted to NHS Pensions by 31 July for voluntary Scheme Pays
- NHS Pensions applies the charge using an actuarial debit calculated using NHS-specific factors
- The debit reduces the accrued pension at retirement — it does not reduce the capital value immediately
- NHS members who have used Scheme Pays may request a Scheme Pays Quote from NHS Pensions showing the prospective reduction
Where NHS members have multiple sources of pension savings (e.g. SIPP for private practice income), the AA excess may be allocated across schemes for Scheme Pays purposes. Specialist advice is recommended.
Common Errors to Avoid
Forgetting employer contributions in DC schemes: employer contributions count towards the AA. Many people only count their own contributions.
Not checking carry forward: failing to calculate carry forward can lead to unnecessarily paying a charge.
Missing the voluntary Scheme Pays election deadline: 31 July is firm. Missing it means paying from personal funds.
Incorrect CPI factors for DB: using the wrong CPI rate in the DB PIA formula gives a wrong PIA. Use September CPI of the prior calendar year as published by the Office for National Statistics.
Not disclosing on SA100: the charge must appear on the tax return even if Scheme Pays covers the full amount.
Compliance Caveats
Tax rules, annual allowance levels, and pension scheme rules change regularly. The rates and thresholds in this guide reflect the position as understood for 2026/27. Individual circumstances vary considerably, particularly for those with both DB and DC pension savings. This guide does not constitute regulated financial or tax advice. You should take advice from a regulated financial adviser and, where relevant, a tax adviser before making decisions about annual allowance charge payment or Scheme Pays elections.
How Global Investments Can Help
Annual allowance charges are a particular concern for our high-earning clients — senior professionals with significant DB accrual, business owners making large pension contributions, and internationally mobile individuals with pension savings across multiple schemes. Global Investments can introduce you to specialist regulated advisers who will review your full pension position, model carry forward calculations, assess Scheme Pays implications, and ensure your self-assessment reporting is correct. Contact us to start the conversation.
This guide is for general information only and does not constitute financial, legal or tax advice. Pension rules, tax rates and programme details change; verify current requirements with a qualified and FCA-regulated pensions adviser before acting. Pension transfers involving defined benefits over £30,000 require regulated advice.