The same £8,000, taken two ways, with a £50,000 a year difference for life
HMRC's own worked example makes the point better than any explanation. Karen has an £8,000 personal pension pot.
- Taken as a small lump sum: 25% tax free, £6,000 taxable. Not a trigger.
- Taken as an UFPLS: 25% tax free, 75% taxable. Is a trigger.
Identical money. Identical tax. The only difference is which lump sum rule the scheme pays it under, and a member can often simply ask for one rather than the other.
Get it wrong and the Money Purchase Annual Allowance applies: £10,000 instead of £60,000, for the tax year of the trigger and every subsequent tax year, for life. It cannot be undone. Unused MPAA cannot be carried forward. Carry forward cannot be used to top it up.
Somebody who takes a small pot the wrong way at 55 loses £50,000 a year of contribution headroom for the rest of their working life, having gained nothing at all by it.
The usual shorthand is wrong in both directions
"Taking anything more than your 25% tax-free cash triggers it" is what almost every free guide says. It is wrong twice.
Wrong direction one: taxable money that does not trigger it. A small lump sum from a pot of £10,000 or less, and you can take up to three from personal pensions, is explicitly on HMRC's non-trigger list even though 75% of it is taxed as pension income. So are trivial commutation, a non-decreasing lifetime annuity, and capped drawdown kept within its cap.
Wrong direction two: something that feels like a trigger and is not. Moving a pot into flexi-access drawdown does not trigger the MPAA. Designating funds is not accessing them, so taking only the pension commencement lump sum leaves your allowance completely intact.
The taper needs both tests failed
This is the second thing calculators routinely get wrong, and it goes the other way: they apply a taper that does not apply.
The allowance only tapers when threshold income exceeds £200,000 AND adjusted income exceeds £260,000. If threshold income is £200,000 or less there is no taper at all, however high adjusted income is. That matters enormously for anybody with a modest salary and large employer contributions, who can have adjusted income well over £260,000 and no taper whatsoever.
Where it does apply, the allowance falls by £1 for every £2 of adjusted income above £260,000, to a floor of £10,000, which is reached at £360,000 of adjusted income.
You cannot contribute your way out of it
Adjusted income adds back employer contributions and net pay contributions, so paying more into the workplace scheme does not reduce it. Threshold income does deduct gross relief-at-source contributions, which is the one lever that works, but it adds back any pay sacrificed under an arrangement made after 8 July 2015, so salary sacrifice does not help here either.
Carry forward, and its two limits
Unused allowance from the previous three tax years can be added to this year's. The order is fixed: the current year's allowance is consumed first, then the earliest carry-forward year first. You must have been a member of a registered pension scheme in a year to carry anything forward from it, though membership alone is enough and no contribution is needed.
The limit that catches people is that carry forward cannot be used against the MPAA. Once flexible access has happened, carried-forward allowance only ever increases the alternative annual allowance of £50,000, which applies to defined benefit accrual rather than to money purchase contributions.
Two separate caps, and both apply
The annual allowance is not the only limit. Tax relief on your own contributions is separately capped at the higher of 100% of your UK taxable earnings or £3,600 gross. Somebody with £20,000 of earnings and a large lump sum to invest hits that cap long before the annual allowance matters, and the two are frequently confused.
Common questions
What triggers the Money Purchase Annual Allowance?
Flexible access. Taking income from flexi-access drawdown, an uncrystallised funds pension lump sum, or exceeding a capped drawdown cap. What does not trigger it is a small lump sum from a pot of £10,000 or less, trivial commutation, a non-decreasing lifetime annuity, capped drawdown kept within its cap, and moving a pot into drawdown while taking only the tax-free cash.
Is it true that taking anything beyond my 25% tax-free cash triggers it?
No, and that shorthand is wrong in both directions. Several taxable payments do not trigger it, a small lump sum being the obvious one even though 75% of it is taxed as pension income. And moving a pot into drawdown does not trigger it either, because designating funds is not the same as accessing them.
How much can the MPAA cost me?
It cuts the annual allowance from £60,000 to £10,000, and it is permanent. It applies for the tax year it was triggered in and every subsequent tax year, for life. Unused MPAA cannot be carried forward, and carry forward cannot be used to top it up. Somebody who takes a small pot the wrong way at 55 loses £50,000 a year of contribution headroom for the rest of their working life.
Can I have the same money paid a different way?
Often, yes, and it is worth asking. HMRC’s own example has an £8,000 pot: paid as a small lump sum it is 25% tax free and £6,000 taxable and is not a trigger. Paid as an UFPLS it is 25% tax free and 75% taxable, identical money and identical tax, and it is a trigger. The only difference is which lump sum rule the scheme pays it under.
When does the taper apply to my annual allowance?
Only when both tests fail. Threshold income must exceed £200,000 and adjusted income must exceed £260,000. If threshold income is £200,000 or less there is no taper at all, however high adjusted income is. A calculator that tests only adjusted income gets this wrong for anybody with large employer contributions and a modest salary.
Can I contribute more to escape the taper?
Not through the workplace scheme. Adjusted income adds back employer contributions and net pay contributions, so contributing more that way does not reduce it. Threshold income does deduct gross relief-at-source contributions, but it adds back any pay sacrificed under an arrangement made after 8 July 2015, so salary sacrifice does not help either.
Which relief method is best?
Salary sacrifice is the only one of the three that escapes National Insurance as well as income tax, and it cuts the employer’s NI too. Net pay gives full relief at your marginal rate immediately with nothing to claim. Relief at source only adds basic rate 20%, so a higher rate taxpayer must claim the rest themselves through Self Assessment, and most never do.