What the £60,000 covers
The annual allowance covers all contributions to your pension(s) in a single tax year:
- Your own personal contributions
- Your employer's contributions
- Any salary sacrifice arrangements that fund pension contributions
- Member contributions and employer contributions to defined benefit schemes
For most workers in defined contribution (workplace) pensions, the £60,000 figure is well above realistic contribution levels — the typical UK worker pays in far less than this. The allowance becomes relevant for higher earners, bonus sacrifice arrangements, and people making catch-up contributions late in their career.
The earnings limit
Tax relief on personal contributions is also limited to 100% of your relevant earnings. So if you earn £35,000, you can contribute up to £35,000 to your pension and get tax relief on it — the £60,000 ceiling isn't reached for someone at this income level. The lower of the two limits applies.
Employer contributions don't count against your earnings limit — they only count against the £60,000 annual allowance.
Carry-forward
If you haven't used your full annual allowance in the previous three tax years, you can carry forward the unused portion. This effectively lets you make a large one-off contribution beyond £60,000 in any given year, drawing on three years of unused allowance.
Carry-forward rules require you to have been a member of a UK-registered pension scheme during the years you're carrying forward from. You don't need to have made contributions in those years — just to have been a member.
The annual allowance charge
If your contributions exceed the allowance, the excess is added to your taxable income and taxed at your marginal rate. This effectively reverses the tax relief you'd otherwise have received on the excess.
For most savers the charge is paid through Self Assessment. For very large breaches (above £2,000), pension schemes can offer to pay the charge on your behalf in exchange for a permanent reduction in your pension pot ("Scheme Pays").