Before 6 April 2025, profit from a qualifying Furnished Holiday Letting counted as relevant UK earnings under Finance Act 2004 section 189, supporting tax-relieved personal pension contributions above the £3,600 floor. That treatment came from two specific paragraphs in s.189(2): paragraph (ba) for UK FHL profit and paragraph (bb) for EEA FHL profit. Finance Act 2025 Schedule 5 Part 1 omitted both paragraphs with effect from the 2025-26 tax year. For a former-FHL owner whose only earned income was holiday-let profit, the tax-relieved personal contribution limit collapses to the £3,600 gross floor. This is a structural change to the relevant-UK-earnings cap, not a change to the annual allowance or the contribution mechanics themselves. This page walks the consequence, the irreducible £3,600 floor that survives, the categories that still count as relevant earnings, and the five practical strategies that can restore meaningful pension headroom.

The enabling legislation is FA 2025 Sch 5, not FA 2024 Sch 5 (a separate Schedule on museum and gallery exhibitions). The position to cite is the enacted FA 2025 Sch 5 c.8, latest revision 20 March 2025. The companion pages on the rules overview, the incorporation route, and the broader transitional timeline cover adjacent ground; this page is the pension-specific deep treatment.

The structural problem: relevant-UK-earnings collapse

FA 2004 s.189 defines the income categories that count as relevant UK earnings for pension-input purposes. The live categories from 6 April 2025 onwards are:

  • Employment income under s.189(2)(a): salary, bonus, and certain taxable employment benefits, broadly equivalent to the s.7 ITEPA 2003 definition.
  • Trading income under s.189(2)(b): the profits of a trade, profession or vocation chargeable to income tax under ITTOIA 2005 Part 2.
  • Certain patent royalties and intellectual-property income under s.189(2A).

Before FA 2025 Sch 5, two further paragraphs sat in s.189(2) and brought FHL profit into the relevant-UK-earnings definition by virtue of ITTOIA 2005 ss.322 to 328A trade-equivalence overrides: paragraph (ba) for UK FHL profit and paragraph (bb) for EEA FHL profit. The omission of both paragraphs is the precise legislative mechanic for the pension impact. There was no replacement category; FHL profit simply drops out of relevant earnings and reverts to UK or overseas property-business income under ITTOIA 2005 Part 3.

The s.190 contribution limit then bites. Relief-eligible personal pension contributions are capped at the higher of the £3,600 gross floor and the individual's relevant UK earnings for the tax year. For a former-FHL owner with no other earned income, the lower of the two ceilings is the £3,600 floor; the previously-available higher ceiling (driven by the FHL profit figure) is gone.

Worked example one: higher-rate headroom collapse

Operator AA, 52, higher-rate (40%) taxpayer. Sole earned income for several years was qualifying FHL profit of £55,000 from a Welsh coastal cottage. No employment, no other trade. Pre-abolition (2024-25), Operator AA's relief-eligible personal pension contribution cap was the lower of £55,000 (her relevant UK earnings via the now-omitted s.189(2)(ba)) and the £60,000 annual allowance under FA 2004 s.227. She contributed £55,000 gross (£44,000 net into the SIPP; £11,000 basic-rate relief reclaimed at source under relief-at-source) and claimed a further £11,000 of higher-rate relief through Self Assessment. Total tax relief: approximately £22,000 against the £55,000 gross contribution.

From 6 April 2025, Operator AA's relevant UK earnings drop from £55,000 to nil (the £55,000 of cottage profit is now UK property business income, not relevant earnings). Her relief-eligible personal contribution limit drops to the £3,600 gross floor under s.190. She can still contribute £2,880 net into a personal pension; the provider reclaims £720 of basic-rate relief at source; she reclaims further higher-rate relief on the £3,600 gross through Self Assessment. Total tax relief: approximately £1,440. Net annual lost headroom: £51,400 of previously-relieved contribution capacity. Net annual lost tax relief: approximately £20,560. The collapse is structural, not a temporary transitional effect.

The £3,600 floor: what it gives you

The £3,600 gross floor is the irreducible minimum available to any 'relevant UK individual' (broadly, UK resident in the tax year, under age 75) regardless of earnings. It is set by FA 2004 s.190 and operates as the higher of two ceilings on the contribution that attracts income-tax relief. You contribute £2,880 net; the scheme administrator reclaims £720 basic-rate relief at source under FA 2004 s.192; the gross £3,600 sits in the pension and grows tax-free. Higher-rate and additional-rate taxpayers with non-FHL income above the basic-rate threshold reclaim the further 20% or 25% through Self Assessment. The floor refreshes each tax year and does not aggregate with prior years' floors.

The floor is a useful pillar but not a substitute for higher headroom. For a former-FHL owner who was previously stacking £40,000+ contributions on FHL profit, £3,600 per year compounds materially more slowly. Operators within 5 to 15 years of planned retirement should model the impact on retirement income; for many the answer combines the floor with one or more of the four strategies that follow.

What still counts as relevant UK earnings

The cleanest restoration of pension headroom is to generate relevant earnings from a different source. The categories that count under s.189(2) after the FHL omissions are: employment income (PAYE salary, bonus, taxable benefits, and certain share-scheme outputs); self-employed trading income from a genuine trade, profession, or vocation under ITTOIA 2005 Part 2 (consultancy, professional services, journalism, art-and-craft trading, and similar), but not ordinary property letting even on former-FHL stock; and certain patent royalties under s.189(2A), narrowly applicable but real for inventor-operators.

For an operator who runs the former FHL alongside a separate trade or consultancy, the relevant-earnings drop on the FHL side is offset by the trade-side earnings. For an operator who is purely a property landlord, the route requires deliberate action: a part-time employment, a parallel trade, or an incorporation that generates director's salary. Two watchpoints. Pension drawdown is not relevant UK earnings (HMRC's PTM044100 is explicit: 'a pension is not classed as earnings'). Investment income (dividends, interest, REIT distributions) does not count either, so a dividend-yielding portfolio does not support higher contributions.

The salary-from-a-limited-company route

Where a former-FHL operator incorporates the property activity into a UK limited company, the company can pay the operator a director's salary. That salary is employment income under s.189(2)(a) and counts as relevant UK earnings in full. A £15,000 per-year salary (above the NI secondary threshold under current FA 2025 employer-NI rates of 15% above the threshold; verify at the modelling date) is deductible by the company under CTA 2009 s.1289, reducing corporation tax. It is taxable in the operator's hands as PAYE employment income. For pension purposes, it supports up to £15,000 of tax-relieved personal contributions: £12,000 net into the pension, £3,000 basic-rate relief at source, further higher-rate relief through Self Assessment if applicable.

The route is modest in scale on its own but it is the foundation for the larger employer-contribution route described next. Most operators using the incorporation pattern run a low-salary, employer-contribution-heavy structure.

The employer-contribution route from the company

The decisive restoration route, for operators willing to incorporate, is the employer pension contribution. The company pays directly into the operator's pension scheme. Employer contributions are not subject to the s.190 relevant-UK-earnings cap; the cap applies only to personal contributions. The constraints that do apply are:

  • Wholly-and-exclusively gateway under CTA 2009 s.54. The contribution must form part of a commercially-reasonable remuneration package. HMRC's accepted position is that an employer pension contribution for a director or employee genuinely working for the company is generally allowable, provided the total package is broadly commensurate with the value of the work done. Documentation matters (board minutes, written remuneration policy, comparator packages).
  • Annual allowance under FA 2004 s.227. Personal plus employer contributions in the year are capped at £60,000 (2025-26; verify at the planning date). Unused allowance from the previous three tax years can be carried forward under s.230.
  • Tapered annual allowance under s.228ZA. Where adjusted income exceeds £260,000 and threshold income exceeds £200,000, the allowance tapers down to a £10,000 floor. The taper treats employer pension contributions as part of adjusted income, which can pull a high-earning operator into the taper.
  • Spreading. Very large one-off employer contributions can be subject to spreading under CTA 2009 s.198 where they exceed 210% of the prior year's contribution. Affects the company's CT deduction timing, not the pension-side input.

Worked example two: incorporation route restores headroom

Operator AA, same profile as worked example one, incorporates the cottage into a UK Ltd company in 2025-26 (separate s.162 CGT and SDLT mechanics, covered on the companion incorporation page). Post-incorporation, the company holds the former FHL and runs the rental activity. Operator AA is the sole director and shareholder.

  • Salary route: Company pays Operator AA £15,000 director's salary. Salary is relevant UK earnings; supports £15,000 of personal contributions. Operator AA contributes £12,000 net (£3,000 basic-rate relief at source) and reclaims further higher-rate relief on the £15,000 gross through Self Assessment.
  • Employer-contribution route: Company pays £40,000 employer pension contribution into Operator AA's SIPP. Not subject to s.190 relevant-UK-earnings limit. Deductible by the company under CTA 2009 s.54, subject to the wholly-and-exclusively gateway; the contribution is documented as part of Operator AA's remuneration package via board minute.
  • Annual allowance check: Personal £15,000 plus employer £40,000 equals £55,000 total input. Within the £60,000 annual allowance under s.227. £5,000 of remaining allowance can be carried forward under s.230, or used to absorb any unused prior-year allowance.
  • Combined annual headroom restored: £55,000 per year, versus the £3,600 floor that would otherwise apply. The route requires the incorporation (with associated SDLT, ATED, and s.162 modelling), the salary cost (employer NI 15% on the £10,250 above the secondary threshold of £5,000, approximately £1,538 of NI), and disciplined documentation of the wholly-and-exclusively position.

The SIPP commercial-property route

A separate strategy, available to operators with accumulated pension wealth, is the SIPP commercial-property purchase. An existing SIPP (or a new SIPP funded by transfer-in) acquires a commercial property: an office, a small warehouse, a retail unit, or similar non-residential building. The property sits inside the pension wrapper, so rental income from the commercial tenant accrues into the pension free of income tax and the gain on eventual disposal is realised free of capital gains tax. The SIPP can borrow up to 50% of net asset value to fund part of the acquisition.

Two hard limits matter. Residential property is excluded: a SIPP cannot acquire residential property without triggering an unauthorised payment charge under FA 2004 s.208 (40% of the unauthorised value) plus a scheme sanction charge under s.239 (15% in many cases). A holiday cottage is residential; a converted commercial workspace would need careful analysis to confirm non-residential status. Connected-party lettings are prohibited: the SIPP cannot let the property to the operator or their family without triggering unauthorised-payment consequences.

For an operator with a £400,000 pension pot and an interest in commercial property, the route generates a meaningful long-term wealth-building stream independent of relevant-UK-earnings headroom. It complements, rather than substitutes for, the floor and incorporation routes.

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The tapered annual allowance: a small upside for some

For higher-net-worth operators, the FHL abolition produces an incidental positive on the taper side. FA 2004 s.228ZA tapers the annual allowance for individuals whose adjusted income exceeds £260,000 and threshold income exceeds £200,000. Both computations included FHL profit pre-abolition (because FHL was trade-equivalent for most pension purposes). Post-abolition, FHL profit becomes property income and may drop out of the adjusted-income computation, depending on the operator's wider profile.

Worked example three: the taper edge case

Operator BB, 56, has £210,000 employment income from a senior executive role and £80,000 of FHL profit from three Cornish cottages. Pre-abolition (2024-25), adjusted income included both: £210,000 plus £80,000 equals £290,000, above the £260,000 threshold; threshold income £210,000, above the £200,000 threshold. Tapered allowance: £60,000 minus ((£290,000 minus £260,000) divided by 2) equals £45,000.

Post-abolition (2025-26), the £80,000 cottage profit becomes property income and adjusted income drops to £210,000, below the trigger. Taper does not apply, full £60,000 annual allowance restored. Net benefit for Operator BB: £15,000 of additional headroom per year. She still has the £210,000 of employment relevant-earnings to support contributions up to the £60,000 cap, so the taper restoration is the binding lift. Materially different from Operator AA in worked example one: for AA the loss of relevant-earnings dominates; for BB the taper restoration is a net positive. Do not generalise either pattern.

Carry-forward and the s.190 gating

FA 2004 s.230 lets an individual carry forward unused annual allowance from the previous three tax years. The unused amount aggregates with the current-year allowance to give a combined headroom, subject to one critical gating rule: tax-relieved personal contributions remain capped by the current-year relevant UK earnings under s.190. An individual with £180,000 of carried-forward allowance plus £60,000 current-year (£240,000 combined) but only £3,600 of current-year relevant earnings is still capped at £3,600 for personal contributions. The carry-forward does not unlock the higher figure for personal inputs.

Employer contributions are not subject to s.190, so an employer can pay the full carry-forward amount into the pension in a single year. For a former-FHL-only operator with significant unused allowance who is incorporating, the employer-contribution route plus carry-forward is a powerful catch-up mechanism: the company pays a large one-off contribution that absorbs the carried-forward allowance, unblocked by the individual's earnings position. Spreading under CTA 2009 s.198 may apply to the company-side deduction timing for very large contributions, but the pension-side input is unaffected.

The five-step decision tree for 2025-26

  1. The floor first. Contribute up to the £3,600 gross floor regardless of other earnings. Unconditional, irreducible minimum.
  2. Other-source earnings check. Identify whether you have employment, self-employment trading, or other relevant earnings above the floor. Contribute up to the lower of those earnings and the annual allowance.
  3. Incorporation modelling for leveraged higher-rate operators. Model the salary plus employer-contribution route; restoration to £55,000+ per year is realistic, but s.162 CGT, SDLT, ATED, and corporation tax need full modelling first.
  4. SIPP commercial-property route for accumulated wealth. Consider a commercial-property acquisition within an existing SIPP where you have the pot and the right tenant. Use of existing wealth, not a replacement for the lost earnings cap.
  5. Carry-forward optimisation. If incorporating, structure employer contributions to absorb the carry-forward; otherwise it sits idle for FHL-only operators due to s.190 gating.

Regulated pension advice is essential before committing to incorporation or the SIPP route. The interaction of salary, employer NI, corporation tax, dividend tax on extraction, the annual allowance, the taper, and the carry-forward is fact-specific, and the SDLT and ATED costs on incorporation are not refundable if the modelling subsequently shows the route was sub-optimal.

Cross-references

The post-abolition rules overview sits on our FHL tax rules, abolition and what happens now page; this page is the standalone deep treatment that the rules-overview's pension FAQ links into. The individual-owner action checklist for the 2025-26 SA100 cycle is on our FHL abolition action checklist page. The company-side architecture for the incorporation route is covered on our companion page on taxation of FHLs in a company; the mechanics of moving the portfolio across are on our transferring FHL portfolio to limited company page. The capital allowances grandfathering treatment is on our FHL capital allowances post-April-2025 page.

For HMRC commentary on the FHL abolition, the most useful sources are PIM4160, PIM4165 (the repeal overview, explicit on the four lost benefits including pensions), and PIM4170 (commencement). For the relevant-UK-earnings definition, the Pensions Tax Manual at PTM044100 walks the s.189 categories; the statutory anchor (FA 2004 s.189 as amended by FA 2025 Sch 5 Part 1) is the definitive position.

Pension decisions are regulated financial advice territory. The income tax and corporation tax modelling underpinning the strategies sits within our remit; regulated pension advice (asset allocation, drawdown strategy) must come from a regulated adviser. We coordinate the tax position with the regulated recommendation rather than substituting for it.