Building up a pension remains one of the most tax-efficient ways to save for your future. However, there are limits on how much you can save before incurring a tax charge. Here are the updated allowances for pensions for the 2025/26 tax year.

The Lump Sum Allowance (LSA) 

When you take part or all your pension as a lump sum, 25% is usually tax free unless it's more than the current LSA of £268,275. You will be charged tax on any amount over the LSA. 

Lump Sum and Death Benefit Allowance (LSDBA) 

The limit on all tax-free lump sums from your pensions is £1,073,100. This includes lump sums taken: 

• when you retire (which also count towards the LSA)
• if you receive a serious ill-health lump sum before age 75
• if you die before age 75 and those inheriting any pension receive the money within two years – known as a death benefit

The two allowances above have replaced the previous Lifetime Allowance.

The Annual Allowance (AA)

The AA limits the amount of pension benefits you can build up over the course of the year before you must pay a tax charge. 

For the 2025/26 tax year, the standard AA remains at £60,000 per year.

There are currently two situations where you can have a lower AA than the standard £60,000:

• The tapered AA - if you are a high earner, your savings may be subject to this. For the 2025/26 tax year, this applies if your threshold income* exceeds £200,000 or your adjusted income** exceeds £260,000. For every £2 of adjusted income over £260,000, your AA is reduced by £1, with tapering stopping when your AA reaches £10,000.
• The money purchase AA – if you have already taken money from a defined contribution (DC) pension (apart from tax-free lump sums). It is currently set at £10,000. This restricts contributions to DC schemes and also prevents the use of carry forward to make a higher DC contribution.

* Threshold income - usually all your income minus the amount you pay into a pension. 
** Adjusted income - all your income plus the amount your employer pays into your pension.

If your benefits exceed the AA, you might be able to offset any tax charge by carrying forward unused AA from the previous three tax years. You must use the unused allowance from the earliest of these years first, and it can only be used once.

Scheme Pays is a facility that allows you to ask the Trustee to pay some, or all, of the tax charge on your behalf. In return, your Plan benefits are reduced by a corresponding amount and further information can be obtained from Gallagher, the Plan administrator.