Pension contributions, defined benefit schemes and the annual allowance
Contributed by Martin Jackson, Lead Technical Writer, Croner-i Ltd
Pension contributions are always in ‘real time’ for tax purposes – they cannot be carried forward or back. A contribution is treated as made when it is actually paid ( FA 2004, s. 188(1) ) and cannot be backdated.
Annual allowance and carry forward
Most tax practitioners will be familiar with the basic workings of the annual allowance for pension contributions, which limits the total value of ‘pension inputs’ which can qualify for tax relief during the tax year. The current limit is £60,000, but as unused allowances from the previous three tax years can be carried forward ( FA 2004, s. 228A–228C ), it is still relevant to point out that for the 2022–23 tax year it was £40,000.
The individual must have been a member of a scheme (though not necessarily the same scheme and no contributions need to have been made) during the year in order to carry forward unused annual allowance from that year.
The current year’s annual allowance must be used first, but once that is exhausted, any unused annual allowance from the previous three years can be carried forward on an earliest year first basis. Carry-forward is still available even where the tapered annual allowance applies to the current tax year.
Pension inputs
It is important to understand that whilst tax relief for the individual may be given for pension contributions, the annual allowance is measured against the value of pension inputs made by, or on behalf of, the member in respect of their pension plans.
For a defined contribution (also called ‘money purchase’) scheme, it is generally a straightforward case of totalling the individual’s and any employer’s contributions made. But for a defined benefit (also called ‘salary related’) scheme, the ‘inputs’ have very little to do with actual contributions.
Defined benefit schemes apply primarily in the case of public sector workers (teachers, civil servants, local authority and NHS workers) and to a dwindling number of large, often formerly state-owned private sector organisations. The precise calculations differ and there are some ‘hybrid’ schemes, but in general the pension which a worker ultimately receives will be determined by a combination of their length of service, their annual salary and some scheme-defined fraction (typically 1/60th or 1/80th). These days such schemes tend to use a ‘career average’ rather than ‘final salary’, but for illustrative purposes using a simplified example, the accumulated pension entitlement in respect of a worker with 12 years’ service on roughly the UK median salary might be:
- 12 years’ service × £40,000 salary × 1/80th = £6,000 annual pension; plus
- 12 years’ service × £40,000 salary × 3/80th = £18,000 retirement lump sum.
Each year the entitlement is recalculated and can be expected to rise as their years of service continue and (hopefully) their salary increases. For instance, to pick up on the same example one year later, it is reasonable to suppose that the employee will have 13 years of service and that their salary has increased to £42,000. The new calculation would be:
- 13 years’ service × £42,000 salary × 1/80th = £6,825 annual pension; plus
- 13 years’ service × £42,000 salary × 3/80th = £20,475 retirement lump sum.
The pension input for annual allowance purposes is the increase in member benefits (adjusted for CPI) over the year ( FA 2004, s. 234–236 ) multiplied by 16, plus the increase in any lump sum entitlement.
Ignoring the CPI adjustment to keep things simple, our employee’s annual benefit (pension) entitlement has increased by £825 and the lump sum entitlement has increased by £2,475. This gives a total pension input of: (£825 × 16) + £2,475 = £15,675.
Admittedly our example scheme is relatively generous (it is actually based on the old Principal Civil Service Pension Scheme), but it is immediately obvious that this calculation bears no relation to any actual contributions made.
By now you may be wondering ‘am I supposed to calculate this and how could I possibly do that?’ but thankfully the answer is ‘no’. Pension scheme providers will normally issue an annual statement giving the necessary values. However, those tasked with completing tax returns should be aware that a separation of the pension input into the employee’s and the employer’s contributions will be required in calculating ‘adjusted income’ for the purpose of measuring the annual allowance available. This is where some interpretation of the data will be needed.
For a defined benefit scheme, ‘employee contribution’ means the amount actually paid by the employee, but the ‘employer contribution’ is calculated as the total pension inputs minus the employee contribution – it is effectively a deemed amount and is not related to the amount the employer actually paid. This can be particularly confusing if the employee’s payslip shows a figure for the employer’s actual pension contributions.
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Doctors’ and dentists’ superannuation
Despite often being self-employed, medical practitioners are usually eligible to join the NHS pension scheme as if they were employees, but there will be no employer’s contribution (because there is no employer).
Instead of making an employer contribution to the scheme, the NHS enhances its contract payment to the partnership/practice in respect of a notional ‘employer contribution’ and the practice is then responsible for making both the employee contribution and what would otherwise have been the employer’s contribution for tax purposes – so both elements are relievable as member contributions.
The amount to be claimed is entered on the tax return in the section (confusingly) headed ‘Payments to your employer’s scheme which were not deducted from your pay before tax’.
As the practitioner will receive personal tax relief on the contribution, superannuation payments are not allowable deductions in computing trading profits for the medical practice.
These contributions also reduce taxable income (at Step 2 of ITA 2007, s. 23 ) so no further deduction is necessary when calculating ‘threshold income’ for annual allowance purposes.
Money purchase annual allowance
The money purchase annual allowance (MPAA) does not apply directly to defined benefit schemes, but if triggered it is subtracted from the annual allowance which would otherwise have applied to the defined benefit scheme, e.g. reducing the standard annual allowance from £60k to £50k.
With certain limited exceptions, the MPAA is triggered when an individual first flexibly accesses a money purchase arrangement by taking some form of benefit from the fund.
Once triggered, the MPAA applies to that year and all future years. If the MPAA applies, unused annual allowances from previous years cannot be carried forward for money purchase scheme contributions (but may still be used in respect of defined benefit scheme contributions).
Tapering the annual allowance
If both the adjusted income and threshold income for an individual exceed specified limits then the annual allowance is tapered by £1 for every £2 in excess of the adjusted income limit, down to the specified minimum.
Note that both the adjusted income limit and the threshold ncome limit must be exceeded for the taper to apply.
| Adjusted income (£) | Threshold income (£) | Minimum annual allowance (£) | |
| 2025–26 | 260,000 | 200,000 | 10,000 |
For the 2025–26 tax year, if the individual’s adjusted income is £360,000 or above (assuming the threshold income limit is also exceeded), the annual allowance will be tapered down to £10,000.
Calculating the adjusted income and threshold income is not straightforward and is difficult to express simply, but in both cases the starting point is the individual’s total taxable income after reliefs but before personal allowances ( ITA 2007, s. 23, step 2 ), plus any taxed lump sum death benefit received.
From that common starting point:
- ‘adjusted income’ is found by adding back any deductions already given for pension contributions at that stage (e.g. for self-employed doctors and dentists in the NHS scheme), plus any pension contributions made under a net pay scheme, plus any contributions to foreign schemes given corresponding relief, plus employer’s contributions ( FA 2004, s. 228ZA(4) );
- threshold income is found by adding back any salary sacrifice, then deducting the employee’s gross pension contributions ( FA 2004, s. 228ZA(5) .
The taxation of pensions is becoming increasingly complex and the effects of the £2,000 cap on salary sacrifice contributions (subject to Royal Assent of the latest Finance Bill) will add to the complexity and confusion. Future articles will delve deeper into other aspects.
Useful links
Links to commentary, legislation and further resources concerning pensions tax can be accessed via this Quick link.
If you have any comments on this article, please e-mail the editorial team at tax-weekly@croneri.co.uk.
Document downloaded on 04-03-2026 from Croner-i Navigate, the UK’s leading online research service for tax, audit and accounting professionals. Find out more at www.croneri.co.uk or call 0800 231 5199.
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