Salary Sacrifice and the Pension Annual Allowance 2026/27
Written by James Whitfield · Updated August 2026 · Checked against 2026/27 HMRC rates.
The pension annual allowance caps total pension contributions at £60,000 per year, or 100% of earnings if lower.1 Salary sacrifice counts towards this limit. So do employer contributions and any other pension inputs. For most employees, the limit is never an issue. For higher earners with generous employer schemes, it can be. This guide covers what counts, how it is calculated, and the tapered allowance for the highest earners.
- The allowance is £60,000 for 2026/27, or 100% of earnings if lower.1
- Salary sacrifice counts in full — it's treated as an employer contribution, not exempt.1
- Most employees use only a fraction of it; it bites for high earners with generous schemes.
- Carry forward unused allowance from the previous three years once the current year is used.3
- The taper cuts the allowance (to as low as £10,000) once adjusted income tops £260,000.2
What counts towards the annual allowance?
The annual allowance measures the total increase in pension rights across all schemes in a tax year. For DC schemes — the most common for salary sacrifice — the total pension input is all contributions paid in: employee, employer and sacrifice. Salary sacrifice specifically shows as an employer contribution on the pension statement.
For DB schemes (NHS, LGPS, civil service, teachers), annual accrual is converted using a factor of 16. If the annual pension increase from one year's accrual is £1,500, the pension input measure is 16 × £1,500 = £24,000. AVCs made alongside a DB scheme are included at face value.
Key point: salary sacrifice is an employer contribution for pension purposes. It is included in full in the annual allowance calculation. There is no exemption for sacrifice versus standard employer contributions.
When does the annual allowance matter?
For most employees, it doesn't. The £60,000 annual allowance is generous relative to typical salaries. Consider:
- An employee earning £50,000 with a 5% employer contribution (£2,500) who sacrifices £5,000 has total DC inputs of £7,500, 12.5% of the allowance.
- A higher earner on £100,000 with a 10% employer contribution (£10,000) who sacrifices £20,000 has total inputs of £30,000, 50% of the allowance.
- A DB scheme member with 1/49 CARE accrual on £80,000 has a pension input measure of 16 × (£80,000/49) = £26,122, leaving £33,878 of headroom for AVCs or other scheme inputs.
The allowance starts to matter for people earning above £80,000 with generous employer contributions, for those approaching the taper threshold, or for DB scheme members who also want to make large sacrifice contributions.
Annual allowance excess charge
If total pension inputs exceed the allowance, the excess is taxed as income in the year of the breach. The charge is your marginal income tax rate on the excess. A higher-rate taxpayer with £5,000 of excess would owe 40% × £5,000 = £2,000. You can pay this directly or via 'scheme pays', where the scheme deducts the charge and reduces your pension benefit accordingly.
If you plan to sacrifice a large amount and aren't sure whether the total (sacrifice + employer contributions) stays below £60,000, ask your HR or pension scheme administrator for a pension input statement before proceeding.
Carry-forward: using unused allowance from prior years
Didn't use your full allowance in the previous three tax years? You can carry forward the unused amount.3 To do so, you must have been a member of a registered pension scheme in the relevant year. You use the current year's full allowance first, then access prior year unused amounts starting with the oldest year.
Carry-forward is most useful if you want to make a large one-off sacrifice, or if you've recently joined a scheme and are catching up. For 2026/27, the prior years available are 2023/24, 2024/25 and 2025/26. The allowance for each of those years was £60,000. Maximum available in 2026/27 with carry-forward is £240,000, but this cannot exceed 100% of your earnings in the current year.
Carry-forward planning requires accurate records of prior-year pension inputs from all schemes. Ask each scheme for a pension input statement for the three prior years before doing any carry-forward calculations.
Tapered annual allowance
The tapered annual allowance applies when threshold income exceeds £200,000 and adjusted income exceeds £260,000.2 The allowance drops by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000. Adjusted income for this purpose includes all pension inputs.
For most salary sacrifice users these thresholds are irrelevant. But for executives, senior medical consultants and similar high earners with large employer contributions, the taper can catch you off guard. Note that any salary sacrifice set up on or after 9 July 2015 is added back when working out threshold income, so you can't sidestep the taper by sacrificing.
Worked example. An executive on a £230,000 salary sacrifices £30,000, cutting cash salary to £200,000, and the employer also pays in 15% (£34,500). The two pension inputs total £64,500:
| Post-sacrifice taxable salary | £200,000 |
| Plus all pension inputs (£34,500 + £30,000 sacrifice) | £64,500 |
| Adjusted income | £264,500 |
| Taper — (£264,500 − £260,000) ÷ 2 | −£2,250 |
| Tapered annual allowance (£60,000 − £2,250) | £57,750 |
Total inputs of £64,500 exceed the £57,750 tapered allowance by £6,750, so an annual allowance charge applies on that excess (unless carry-forward covers it).
Frequently asked questions
Does salary sacrifice count towards the annual allowance?
Yes, in full. A salary sacrifice contribution is treated as an employer contribution, and all employer contributions count towards the £60,000 annual allowance. There's no special exemption for sacrifice — the method of contributing doesn't change how the allowance is measured.
What happens if I exceed the annual allowance?
The excess is added to your taxable income and taxed at your marginal rate — the annual allowance charge. You can pay it yourself or use "scheme pays", where the pension scheme settles the charge and reduces your benefits. Carry-forward of unused allowance from earlier years can often prevent a charge.
How much can I carry forward in 2026/27?
Up to three prior years — 2023/24, 2024/25 and 2025/26 — each with a £60,000 allowance. Combined with the current year that's a theoretical maximum of £240,000, but your total contributions can never exceed 100% of your earnings in the current tax year. You must also have been a pension scheme member in the years you carry forward from.
Who is affected by the tapered annual allowance?
Only high earners: your threshold income must top £200,000 and your adjusted income (which includes all pension inputs) must top £260,000. Above that, the allowance falls by £1 for every £2 over £260,000, to a floor of £10,000. Salary sacrifice set up since 9 July 2015 is added back for the threshold income test, so it can't be used to duck the taper.
Do employer contributions use up my allowance too?
Yes. The allowance covers the total of employee contributions, employer contributions and salary sacrifice, plus the deemed value of any defined benefit accrual (16× the yearly increase in your pension). For most people the combined figure is comfortably under £60,000, but check if you have a generous employer scheme and are also sacrificing heavily.
Sources & references
Every headline figure in this guide is checked against the official HMRC and GOV.UK pages below and reflects the confirmed 2026/27 tax year. Each link opens the relevant official page in a new tab.
- Pension annual allowance ↗ https://www.gov.uk/tax-on-your-private-pension/annual-allowance
- Tax on your private pension contributions ↗ https://www.gov.uk/tax-on-your-private-pension
- Check unused annual allowances (carry forward) ↗ https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings
- Salary sacrifice and the effects on PAYE (HMRC) ↗ https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye