Tapered annual allowance — who it affects and how to calculate it.
The two income tests, how the £1-for-every-£2 taper reduces your allowance, the £10,000 minimum floor, and how salary sacrifice can keep you outside the taper entirely.
- ▸The tapered annual allowance only applies if you breach both thresholds: threshold income above £200,000 AND adjusted income above £260,000.
- ▸Once both thresholds are breached, the £60,000 allowance reduces by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000.
- ▸Salary sacrifice reduces threshold income directly and can push high earners below the taper thresholds entirely.
The two thresholds
The tapered annual allowance is designed to restrict pension tax relief for very high earners. It only applies when an individual exceeds both of two income thresholds. Breaching just one threshold is not sufficient — both tests must be failed simultaneously for the taper to apply.
The two thresholds for 2025/26 are:
Threshold income: £200,000. Threshold income is broadly your net income — all taxable income minus personal pension contributions (but not employer contributions and not salary sacrifice). If your threshold income is £200,000 or below, the taper does not apply regardless of any other figure.
Adjusted income: £260,000. Adjusted income is threshold income plus all employer pension contributions (including salary sacrifice amounts treated as employer contributions). If your adjusted income is £260,000 or below, the taper again does not apply.
Both must be exceeded. This two-test design means that high earners who receive significant employer pension contributions can have an adjusted income above £260,000 even with a threshold income below £200,000 — and if threshold income is under £200,000, the taper still does not apply.
How the taper reduces your allowance
Once both thresholds are breached, the annual allowance reduces at a rate of £1 for every £2 of adjusted income above £260,000. Starting from £60,000, the allowance decreases as adjusted income rises:
- Adjusted income £260,000 → annual allowance £60,000 (no reduction)
- Adjusted income £280,000 → annual allowance £50,000 (£20,000 over threshold ÷ 2 = £10,000 reduction)
- Adjusted income £300,000 → annual allowance £40,000 (£40,000 over threshold ÷ 2 = £20,000 reduction)
- Adjusted income £340,000 → annual allowance £20,000
- Adjusted income £360,000 → annual allowance £10,000 (minimum floor — see below)
The reduction is applied in £1 steps for every £2 of adjusted income. There is no threshold at which a single extra pound of adjusted income causes a cliff-edge drop — the reduction is linear.
The £10,000 minimum floor
The taper does not reduce the annual allowance to zero. The minimum annual allowance is £10,000, which is reached when adjusted income reaches £360,000 (£100,000 above the £260,000 threshold, at £1 reduction per £2 = £50,000 reduction from £60,000). For anyone with adjusted income above £360,000, the allowance remains fixed at £10,000.
This floor is also the Money Purchase Annual Allowance level, which creates an important interaction: if someone has already triggered the MPAA (by taking flexible income from a DC pension), their DC contributions are already capped at £10,000 regardless of the taper. The taper's £10,000 floor is relevant mainly to those whose allowance is being calculated fresh each year.
Worked example: adjusted income £300,000
A partner at a professional services firm has the following income composition in 2025/26:
- Employment income: £260,000
- Bonus: £20,000
- Employer pension contribution: £20,000
- Personal pension contribution (via salary sacrifice, counted as employer contribution): £0
Threshold income = £260,000 + £20,000 = £280,000. This exceeds £200,000. Test one: failed (i.e. threshold income exceeds £200,000).
Adjusted income = threshold income + employer pension contributions = £280,000 + £20,000 = £300,000. This exceeds £260,000. Test two: failed.
Taper calculation: adjusted income £300,000 − threshold £260,000 = £40,000 excess. Reduction = £40,000 ÷ 2 = £20,000. Tapered annual allowance = £60,000 − £20,000 = £40,000.
Total pension input (employer contributions only, if no personal contributions) = £20,000. This is within the £40,000 tapered allowance, so no charge arises.
If the employer contribution were £50,000 instead, adjusted income would rise to £330,000 and the tapered allowance would fall to £25,000. The employer-only pension input of £50,000 would then exceed the £25,000 allowance by £25,000 — and an annual allowance charge would apply on that excess, even though the individual made no personal contributions.
Salary sacrifice to bring adjusted income below thresholds
Salary sacrifice is a legitimate way to reduce both threshold income and adjusted income because, in the UK pension context, amounts sacrificed are treated as employer contributions. Sacrificed amounts leave the individual's employment income (reducing threshold income) and, while they are added back into adjusted income, they may also reduce the underlying employment income sufficiently to bring adjusted income below £260,000.
The most effective scenario is a worker whose threshold income is only modestly above £200,000. If salary sacrifice brings threshold income to £200,000 or below, the taper does not apply at all — regardless of adjusted income. This is the point at which salary sacrifice produces maximum leverage against the taper.
For workers deeper inside the taper, sacrifice can reduce the tapered allowance reduction (by shifting more income from employment income into the employer contribution category), but the adjusted income test means the benefit is less clean. The annual allowance checker models the taper against actual income figures, and the salary sacrifice calculator shows the effect of different sacrifice levels on threshold and adjusted income.
This is factual information, not financial advice. If you're unsure what's right for your situation, speak to an FCA-regulated financial adviser.