Tax Benefits of Pensions
Pensions are one of the most tax-efficient ways to save in the UK. Understanding the tax advantages can help you make the most of every pound you put away.
Pensions enjoy a uniquely favourable tax treatment in the UK, making them far more efficient than most other savings vehicles.
Tax relief on contributions
Every pound you pay into a pension is topped up by the government via tax relief. Basic rate taxpayers get 20% relief, meaning a £100 contribution only costs £80 out of pocket. Higher rate taxpayers can claim 40% relief, and additional rate taxpayers 45%.
Tax-free growth
Investments inside a pension grow free of income tax and capital gains tax. This means your money compounds more efficiently than in a standard investment account.
25% tax-free lump sum
When you access your pension from age 55 (rising to 57 in 2028), you can take up to 25% of your total pension pot as a tax-free lump sum. The remaining 75% is subject to income tax when withdrawn.
Inheritance planning
Pension funds are typically outside your estate for inheritance tax purposes, making them a powerful tool for passing wealth to the next generation. From April 2027, however, new rules will bring unspent pension funds into the IHT net — professional advice is recommended.