Armed Forces Pension Annual Allowance 2026/27

The Annual Allowance is the principal pension tax constraint affecting senior Armed Forces personnel. Officers at OF-4 and above (Wing Commander, Commander RN, Lieutenant Colonel and up) are the group most likely to meet an AA charge, usually in a promotion year. A note on the label: the AFPRB reserves "Senior Officers" for OF7 and above, the group whose pay moved to it from the Review Body on Senior Salaries in July 2025, so this guide says OF-4 and above where it means OF-4 and above. It covers Pension Input Amount calculation, Scheme Pays, carry forward, McCloud compensation and why AVCs are the wrong tool here.

To check whether those tax, NI and AFPS 15 lines look right on your own JPA slip, see How do I check my payslip is correct?.

What the Annual Allowance is

The Annual Allowance (AA) is the maximum amount of pension growth (Pension Input Amount, PIA) that can be accrued in a single tax year without triggering an income tax charge. The standard AA is £60,000 (GOV.UK - annual allowance).

The AA was introduced in 2006 as part of pension simplification. It targets primarily senior public-sector personnel and high-earning private-sector individuals - including Service personnel approaching senior ranks.

How the PIA is calculated for AFPS

For defined benefit schemes like AFPS 75 / 05 / 15 the Pension Input Amount is a difference between two valuations of the same benefits, one at the start of the pension input period and one at the end:

opening value  = (pension accrued at the start x 16) + separate lump sum
                 then uprated by the 12-month CPI increase to the
                 September before the tax year begins
closing value  = (pension accrued at the end x 16) + separate lump sum
                 with no CPI step
PIA            = closing value - opening value

The opening position is subtracted once, not twice, and the CPI step sits inside the opening value rather than being deducted separately at the end. Sections 234 to 236ZA of the Finance Act 2004; the four steps are set out at HMRC Pensions Tax Manual PTM053301, whose step 4 is "Increase the total after step 3 by the 12 month increase in the CPI to the September before the start of the tax year."

The "x 16" multiplier is HMRC's valuation factor for defined benefit accrual. For AFPS 15 (CARE), one ordinary year adds 1/47 of that year's pensionable earnings to the pot, so the PIA in a quiet year is close to:

PIA is roughly (this year's pensionable earnings / 47) x 16

For a Wing Commander on pensionable earnings of around £100,836 (OF4-04 from 1 April 2026), one year of accrual is £100,836 / 47 = £2,145.45, and £2,145.45 x 16 = £34,327.20 of PIA - inside the £60,000 AA in a normal year.

Triggers for AA breaches at OF-4 and above

Three primary triggers cause officers at OF-4 and above to breach the AA:

1. Promotion in the year

A promotion from Squadron Leader to Wing Commander is a salary jump of around £15,000. The PIA in the promotion year captures both:

• One year of normal accrual on existing service.
• The retrospective revaluation of all prior service to the new salary level (this can amplify PIA substantially in final-salary schemes - though not in AFPS 15 CARE).

For AFPS 75 / 05 (final salary closed schemes), promotion-year PIA can easily exceed £100,000 because all prior years' accrued pension recalculates upward.

For AFPS 15 (CARE), promotion-year PIA is more contained but still can breach AA in combination with other factors.

2. In-service revaluation running ahead of CPI

This is the trigger most often described wrongly, including in an earlier version of this guide, so it is worth being exact.

Indexation on its own does not generate a Pension Input Amount. The test uprates the opening value by CPI before comparing it with the closing value, so an uplift equal to CPI lifts both sides of the subtraction by the same proportion and nets out to roughly nil. A guide that multiplies an inflation uplift by 16 and calls the answer PIA is double-counting the thing the statute already nets off.

What does generate PIA is revaluation above CPI. AFPS 15 indexes in-service accrual on the Average Weekly Earnings index, not on prices, so in a year when earnings outrun prices the excess is real growth and it is tested. The same is true of a real-terms pay award, which raises the closing value without raising the opening one.

Note also that AFPS 15 opened on 1 April 2015, so nobody has more than eleven years of AFPS 15 service in 2026/27. A worked example built on "20 years of AFPS 15 service" is describing something that cannot exist; legacy AFPS 75 or AFPS 05 service sits alongside it and is valued on its own rules.

3. McCloud remedy unwinding

The McCloud remedy can retrospectively change pension service between AFPS 15 (CARE) and AFPS 75 / 05 (final salary) for the period 1 April 2015 to 31 March 2022. This can cause significant retrospective PIA recalculation.

HMRC has special provisions to handle McCloud-related AA charges - see the section on McCloud Compensation below.

The AA charge

If PIA exceeds the AA in a tax year, the excess is chargeable at the Service person's marginal rate of tax:

For an officer with PIA of £85,000 (AA breach of £25,000), at the higher rate the AA charge is 40% x £25,000 = £10,000.

Tapered Annual Allowance

The taper has two income tests and both have to be met. It "will not be reduced if your threshold income for the current tax year is £200,000 or less"; above that, "for every £2 your adjusted income goes over £260,000, your annual allowance for the current tax year reduces by £1", and "the minimum reduced annual allowance you can have in the current tax year is £10,000" (GOV.UK, work out your tapered annual allowance). The £10,000 floor is therefore reached at adjusted income of £360,000.

Few Armed Forces personnel reach this threshold, but officers at OF-7 and above can. For these officers:

• Adjusted income includes basic pay + X-factor + non-cash benefits.
• Pension growth in the year is added back to determine adjusted income for taper purposes.
• The taper interaction is technical and typically requires specialist advice.

Scheme Pays - settling AA from pension benefit

Members can require the scheme to settle the AA charge from the eventual pension benefit rather than from current cash. Mandatory Scheme Pays needs all three of the following, not just the £2,000 one:

• "your pension savings with that scheme are more than the annual allowance (currently £60,000) for that tax year";
• "your tax charge is more than £2,000 for that tax year";
• "you've told them by the deadline of 31 July of the year after the following tax year".

Source: GOV.UK, who must pay the pensions annual allowance tax charge. Read that third condition carefully: for a 2025/26 charge the deadline is 31 July 2027, not the July immediately after the tax year ends. A guide that says "the July following the tax year" is a full year early, which is the difference between a mandatory election and having to ask the scheme to accept a voluntary one.

The reduction to the eventual pension is calculated actuarially and depends on age, service and scheme, so the scheme's own quotation is the only figure worth working from.

For most officers at OF-4 and above, Scheme Pays is preferred to writing a cash cheque to HMRC - it preserves liquidity now while the pension absorbs the cost.

Carry forward - using prior years' unused AA

Carry forward allows unused AA from the prior 3 tax years to be used in the current year:

• Available where the member was a registered pension scheme member in each year carried forward.
• Applied to the breach amount only after current-year AA is exhausted.
• Each prior year's unused AA can be used once.

For an officer with PIA of £85,000 in 2025/26 (breach £25,000), if their prior PIA history was:

Total unused: £45,000 (across 2023/24 and 2024/25). The 2025/26 breach of £25,000 is fully absorbed by carry forward; no AA charge in 2025/26.

Carry forward is the single most powerful AA mitigation tool for members with an irregular PIA history. The Armed Forces Pension Scheme issues annual Pension Input Statements showing PIA - keep these to support carry forward calculations.

McCloud Compensation for past AA charges

The McCloud remedy created retrospective PIA changes for the remedy period 1 April 2015 to 31 March 2022. HMRC introduced compensation provisions:

• Refunds of past AA charges - where a member paid an AA charge that would not have been due under the corrected service position, HMRC refunds the charge.
• Compensation for tax interest - where the refund is processed late, HMRC pays compensation.
• Tax-free status - both the original tax and compensation are non-taxable in the refund year.

Where the corrected position produces a refund it can be substantial, but the amount is entirely a function of the individual's own remedy-period figures and no typical range can be quoted for it. Your remediable pension savings statement is the document that gives the number.

AVCs make an Annual Allowance problem worse, not better

An AVC is often suggested as a response to AA exposure. For a member already at or over the allowance it is the wrong way round, and the reason is mechanical rather than a matter of judgement.

• A money-purchase AVC contribution is itself a Pension Input Amount. It is added to the defined benefit PIA from AFPS and the total is what the Annual Allowance is tested against. Paying more in therefore makes the excess, and the charge, larger.
• AVC contributions get tax relief in the normal way; they do not "cost the member full marginal rate on the contribution". What happens to a contribution above the available allowance is that relief is clawed back through the AA charge, which is a different thing and is exactly why it does not solve the problem.
• AFPS AVCs are not a salary sacrifice arrangement. Salary sacrifice reduces the salary on which the employer pays you; an AVC is a contribution out of pay that has already been earned.

Where an AVC is still worth considering is the ordinary case of a member with headroom under the allowance who wants more retirement saving than 1/47 of pay provides, given that the employer side of AFPS already runs at 73.5% of pensionable pay from 1 April 2024 (AFPRB Fifty-Fifth Report 2026, Appendix 4, footnote 107). Carry forward is what makes headroom, and it is the first thing to check.

Action checklist for OF-4 and above

For Service personnel with potential AA exposure:

1. Track your PIA via the annual Pension Input Statement from Veterans UK / Defence Business Services.
2. Save Pension Input Statements from prior 3 years for carry forward calculations.
3. Plan timing of promotions where possible - a year with no other pay rises is ideal for absorbing promotion-year PIA.
4. Use Scheme Pays where all three conditions are met, and diarise 31 July of the year after the following tax year, not the July straight after year end.
5. Verify your post-McCloud PIA position - compensation may be due.
6. Do not use an AVC to manage an AA charge; it adds to the Pension Input Amount being tested.
7. Consider the Forces Pension Society for an impartial annual review: £47 for an annual subscription.
8. For substantial AA exposure, consult a regulated FCA-authorised pension adviser experienced with Armed Forces personnel.

Common errors and what to do

Common AA-related errors at these ranks:

1. Missed AA reporting on Self Assessment - the SA return must report any AA charge. Submit a corrective SA if missed.
2. Scheme Pays election missed or mistimed - the mandatory deadline is 31 July of the year after the following tax year, so 31 July 2027 for a 2025/26 charge.
3. Forgotten carry forward - easily missed, can save thousands.
4. McCloud-period miscalculation - review pre-2022 statements when RSS arrives.

When to talk to a pensions specialist

A specialist becomes essential when:

• Your PIA has exceeded the AA in any of the past 4 years.
• You are within 2 years of retirement and need to plan AVC / commutation strategy.
• You face the McCloud remedy choice with material AA implications.
• You have served across multiple AFPS schemes (75 / 05 / 15) with complex history.
• You have private practice income alongside Service pay (not common in Armed Forces, but happens with Reservist commitments).

A regulated FCA-authorised pension adviser experienced with AFPS members is the right specialist for these cases.

More military pay guides

Start at the UK Armed Forces pay, pensions and payslips hub for the full cluster, or go straight to:

• Armed Forces Pension AFPS 15 - the scheme mechanics behind the PIA: 1/47 accrual, EDP and death-in-service.
• McCloud remedy deep dive - how remedy-period recalculation changes past AA positions.
• X-factor deep dive - the pensionable 14.5% supplement that inflates senior officers' pension growth.

Disclaimer

PayslipIQ provides automated educational guidance based on the figures you supply. It is not regulated pension or financial advice. The Annual Allowance and AFPS pension input calculations are technical and interact with McCloud remedy rules, HMRC tax provisions, and individual service history - for substantial decisions especially around AA charges, Scheme Pays, carry forward, or McCloud compensation, consult a regulated FCA-authorised pension adviser experienced with Armed Forces personnel.