Who needs the calculation before payment?
High earners and owner-directors planning a bonus or employer pension payment should test the whole tax year, including other jobs, investments and pension schemes. This guide uses 2026/27 rules checked on 6 November 2026. It addresses pension tax capacity, not whether a particular investment or retirement product is suitable.
Do not decide the contribution from salary alone. A bonus, rental profit or dividends can change the result. Defined-benefit pension growth can also use allowance even where no comparable cash payment appears on a payslip.
Two income tests, not one salary threshold
Finance Act 2004 section 228ZA provides the taper framework. For 2026/27, tapering applies where threshold income exceeds £200,000 and adjusted income exceeds £260,000. The standard £60,000 allowance reduces by £1 for each £2 of adjusted income above £260,000, down to £10,000. HMRC explains the statutory calculations in PTM057100.
These terms are distinct from adjusted net income used for other personal tax tests. Build each from the relevant income and pension adjustments. A threshold-income result at or below £200,000 prevents this taper even if adjusted income is higher. That does not remove other annual allowance restrictions.
Why employer contributions and salary sacrifice need care
Adjusted income brings employer pension provision into the calculation. For defined contribution schemes, collect employee and employer contributions, including relief added to relief-at-source contributions. For defined-benefit arrangements obtain pension input amounts from administrators rather than substituting the employee deductions.
Relief-at-source member contributions reduce threshold income on the gross basis specified in the rules, but do not simply reduce adjusted income in the same way. Relevant pension salary-sacrifice or flexible remuneration arrangements made after 8 July 2015 require threshold-income additions. Sacrificing a bonus therefore does not automatically avoid tapering. Recalculate both tests from the actual arrangement.
Hypothetical 2026/27 comparison
Assume threshold income has been correctly calculated at £240,000, adjusted income at £300,000, and total pension input at £60,000. Assume no money purchase annual allowance and no unused allowance available. The taper reduction is (£300,000 minus £260,000) divided by two, or £20,000. The annual allowance is therefore £40,000 and pension input exceeds it by £20,000.
This £20,000 is an excess to consider for an annual allowance charge, not the tax bill itself. The tax calculation depends on the individual’s position. If adjusted income were instead £280,000 with the other assumptions unchanged, the allowance would be £50,000. This is an arithmetic comparison, not a suggested transaction or a client case.
Carry forward does not answer every pension question
Unused annual allowance from the previous three tax years may cover an excess, subject to scheme-membership and usage conditions. Establish the allowance actually available in each earlier year, including any taper then applying, and deduct inputs and amounts already used. Do not assume every earlier year supplies £60,000 of unused capacity.
Check separately whether flexible pension access has triggered the money purchase annual allowance. Carry forward cannot increase that money purchase limit. Personal contribution tax-relief limits and company deductibility are also separate questions. An annual allowance calculation is not an approval of the contribution’s relief, commercial purpose or investment suitability.
Agree the evidence and sequence before committing
Gather projected taxable income, bonus terms, pension statements and the three-year allowance history. Reconcile contributions across schemes, model the proposed change and retain the assumptions. Coordinate the agreed payroll and contribution dates with the employer and scheme, then revisit the calculation when final-year figures are available. Consider reporting and payment obligations if an excess remains.
Use our higher-earner tax planning service for the tax analysis, alongside an appropriately authorised financial adviser for pension suitability. Owner-directors can also review profit extraction. Book a Tax Consultation or Get in Touch before committing to a material payment.
For advice on your own circumstances, see our Higher-earner tax planning service and agree the scope before acting.
Official sources and further reading
These primary sources support the framework above. Check the current version before acting because tax law and HMRC guidance can change.