18 September 2026
The pension tax trap that often catches high-earning expats off guard
To illustrate, let us take a situation in which you have just received your self-assessment tax return summary, and there is a charge on it you did not expect- several thousand pounds, due by 31 January, for something called an annual allowance tax charge.
You have not done anything wrong. You have not tried to avoid anything. Your employer has simply been paying into your pension on your behalf, as they always have. And yet HMRC is asking you to pay extra tax because of it.
The UK government encourages people to save into pensions by giving tax relief on contributions. In simple terms, money you put into a pension is excluded from your pre-tax income, meaning you effectively get a discount on it at your tax rate. To prevent very high earners from sheltering unlimited amounts of income in pensions and avoiding tax indefinitely, the government places a cap on how much can be contributed each year while still receiving that relief. This cap is called the annual allowance. For most people in the 2026/27 tax year, it stands at £60,000. If total contributions, yours and your employer’s combined, go above that figure, HMRC charges income tax on the excess.
Here is where it gets more complicated for high earners. Under rules introduced in the Finance Act 2004, sections 228 to 238ZB, and subsequently tightened by later Finance Acts, the £60,000 annual allowance does not apply equally to everyone. For those with high incomes, it is gradually reduced, or tapered, down to a minimum of just £10,000.
The taper is triggered when two income figures both exceed certain limits. The first is your threshold income, broadly, your salary and other taxable income, excluding pension contributions, which must exceed £200,000. The second is your adjusted income, which adds your employer’s pension contributions on top, which must exceed £260,000. When both of these are exceeded, your £60,000 allowance shrinks by £1 for every £2 your adjusted income goes above £260,000.
To put that in plain terms: if your adjusted income is £300,000, that is £40,000 above the £260,000 threshold, your annual allowance is reduced by £20,000, leaving you with just £40,000. If your adjusted income reaches £360,000, the taper reduces your allowance to the minimum of £10,000. It cannot go any lower than that, but for someone with a generous employer pension contribution, £10,000 can be used up very quickly indeed.
The leaver who did not quite leave
Ahmed moved to Dubai eighteen months ago for a senior role with an international firm. He assumed that leaving the UK meant leaving the UK tax system. What he did not realise is that the UK has a specific piece of legislation, the Statutory Residence Test, introduced under Finance Act 2013, which determines residence status based on a detailed set of rules around days spent in the UK and connections maintained here. Ahmed still has a UK home, visits regularly for work, and his wife and children remain in London. Under the Statutory Residence Test, he is still UK resident for tax purposes. His former UK employer’s pension contributions have continued, his adjusted income exceeds £260,000, and his annual allowance has been tapered significantly. He now has an annual allowance charge on his first self-assessment return in Dubai, a bill he did not know was coming and has not budgeted for.
The arriver who was never told
Sarah relocated from Singapore to London six months ago to take up a director-level role paying £320,000. On her first day, her employer automatically enrolled her into the company pension scheme and began contributing £30,000 per year on her behalf. Her adjusted income, her salary plus the employer contribution, is £350,000, which tamps down her annual allowance to just £15,000. The employer contribution of £30,000 already exceeds that limit by £15,000, meaning Sarah has an annual allowance charge before she has contributed a single penny herself. Nobody mentioned this when she signed her contract. Nobody mentioned it when she joined the pension scheme. She finds out when her accountant files her first UK tax return.
The good news is that this is not a problem without solutions, but the solutions work far better when identified in advance rather than after the charge has already arisen.
The first option is to carry forward. HMRC allows you to carry forward unused annual allowance from the previous three tax years, as set out in the HMRC Pensions Tax Manual at PTM055100. There is no minimum threshold to use carry forward, if you simply have unused allowance from earlier years, it can be added to your current year’s allowance and used to absorb the excess. This is particularly valuable for expats who were living abroad in countries without UK pension schemes and were not contributing to a UK pension during those years, as they may have accumulated a significant amount of unused allowance.
The second option is scheme pays. Where your total annual allowance charge across all pension schemes exceeds £2,000, and the pension input amount to the scheme from which the charge will be paid exceeds the standard annual allowance of £60,000, you may be able to ask your pension scheme to pay the charge directly from your pension pot rather than finding the cash yourself.
The third and most effective option is simply to plan ahead. Reviewing your remuneration structure with a tax adviser before the tax year begins, looking at how contributions are structured, what your adjusted income is likely to be, and whether there are legitimate ways to manage it below the relevant thresholds, is almost always more cost-effective than managing a charge after the event. It is worth noting that salary sacrifice is sometimes suggested as a solution, but for arrangements entered into after July 2015 the sacrifice must be added back into threshold income for taper purposes, meaning it does not always produce the relief people expect.
If you are moving to the UK and your combined salary and employer pension contributions are likely to exceed £260,000, this is a conversation worth having before your first UK tax year begins rather than after. And if you have left the UK but are not certain that you have fully broken UK residence under the Statutory Residence Test, it is equally worth checking whether you remain within the scope of these rules without realising it.
At Hodgens Global, we work with expats at both ends of this journey. If any of the above sounds familiar, we would be very happy to talk you through your position.
Not sure whether UK pension rules still apply to your situation? Get in touch, and we will give you a clear picture of where you stand.