An annotation is a marking inside a book to note key elements in the story. This could be underlining an important phrase, highlighting an important sentence, and also making a note of specific points in the story by writing down your own thoughts inside the margins.
Specifically, when using the RHA method, an annotation is a small, handwritten note on either a sticky note or the margin of a book that displays your personal thoughts while reading.
Attached is an example of annotating a piece of writing.