Using pensions and ISAs to reduce your tax bill

At a glance

• Pensions and ISAs remain the most popular and tax-smart ways to save.
• Using all your pension and ISA allowances before this tax year-end will bring your tax bills down.
• Pensions remain the most tax-efficient way to save for the long-term, while ISAs are simple, flexible and put your cash at your fingertips.

Although the Government has pledged not to raise taxes for working people, many of us will face higher tax bills as a direct result of the Autumn Budget. So it’s more important than ever that you make the most of the tax savings opportunities of pension and ISA allowances.

Many of us will face bigger tax bills this year. With the personal allowance frozen until 2027/28, plus the additional rate threshold dropping to £125,140, more of us will find ourselves in a higher tax band, particularly if we’re lucky enough to get a pay rise or bonus. Added to this, the Chancellor used her Autumn Budget to announce that the £40 billion ‘black hole’ in the nation’s finances would be mended by rises in Capital Gains Tax, Inheritance Tax and employee NI Insurance contributions for businesses.

What will higher taxes mean for your investments?

These changes mean you may need to invest more just to stay on track towards your long-term goals. Or even pay your tax bill. Which may mean revisiting your financial plans for the future.

It’s more important than ever that your financial plan makes full use of pensions and ISAs and their tax-free allowances to make every penny count. In our recent Real Life Advice Report, almost half (47%) of those surveyed (12,000) said that financial advice had helped them reach a specific life goal, and an overwhelming majority (92%) of those taking ongoing advice said it had significantly improved both their financial and mental wellbeing.¹

Why use pensions and ISAs together?

Some investors think they need to decide between a pension or an ISA. It’s not an either/or question, and a combination of both is often the savviest way to save.

Of the two, personal pensions are still the most tax-efficient for long-term investing, since the basic-rate tax relief guarantees you a 20% cash boost from the government on contributions you make (subject to certain limits). Plus, if you’re in a workplace pension scheme, your employer will also be contributing at least 3% of your qualifying earnings.

Those are powerful persuaders on why a pension should be part of your overall long-term financial planning. There is a £60,000 annual allowance for pensions contributions.
This covers both contributions you make personally, and any made by your employer. In addition, tax relief on your personal contributions is limited to the higher of 100% of your earnings in the tax year and £3,600, but that’s still a great tax incentive. Plus, you can access a personal pension from age 55, though this is set to rise to 57 in 2028.

That’s younger than you can access the State Pension, where you must be at least 66 but for many this will be age 67 or 68.

Unfortunately, since the Autumn Budget, from April 2027, any unspent pension pots will be counted as part of your estate and liable to IHT, although pension funds which pass to a spouse or civil partner will remain free of IHT on first death.

On the other hand, ISAs (Individual Savings Accounts) are hugely popular – the number of adult ISAs in the UK rose to £22.3 million in 2021/22.² ISAs offer a tax-efficient, simple and flexible way to save. There are various types, including Cash, Stocks and Shares, and Lifetime ISAs which are only available to those between the ages of 18 and 40.

Are ISA contributions tax deductible?

Since you don’t pay tax on the interest from a Cash ISA or gains from a Stocks and Shares ISA, you don’t need to declare them on your tax return. You keep any interest or profit you earn. You can invest a maximum of £20,000 per tax year in an ISA or combination of ISAs, so you could put half in a Cash ISA and half in a Stocks and Shares ISA depending on how each was performing.

Unlike pensions, ISAs have no age restrictions to access your money. That flexibility means you can have cash ready for rainy day emergencies, as well as for other goals you might be saving for, like a summer holiday or new car.

Using a combination of pensions and ISAs is a smart way to plan for money you might need in the short-term, and savings you might need in later life.
How can I balance pensions and ISAs?

Creating a flexible, tax-efficient retirement plan to suit you, and everything you’re planning to do, usually means using a combination of pensions, ISAs and potentially, other types of investment too.

Choosing the best way to balance that mix is your personal choice – and many people use financial advisers to help them decide. If you already have a personal pension, or an ISA, tax year-end is an important time to check in with your adviser to see how each is performing, and if you want to rebalance your savings portfolio.

ISAs and pensions – the benefits

How can my pension reduce my Income Tax bill?

Another advantage of personal pension contributions is that they can help reduce your taxable income, and therefore the amount of Income Tax you’ll pay. By paying into your pension before tax year-end, you may be able to hold on to certain benefits and allowances, by keeping you in a lower tax band threshold.

All of which means you’ll have more money to save or spend.
You can’t use ISAs in the same way since any contributions you make come from your taxed income.

Pension contributions can help you manage your tax thresholds, too. Paying into a pension may help higher earners bring their income below the additional rate tax threshold of £125,140. Or tip a higher rate taxpayer who’s earning just over the £50,270 threshold back below the higher rate tax band.

In addition to the 20% basic-rate relief, higher or additional-rate taxpayers can also claim an extra 20% or 25% as applicable relief on pension contributions via HMRC.

Pensions, ISAs and your retirement income

You can take 25% of your pension fund tax-free. After that, the retirement income you take from a pension is taxable, whereas you can access funds from an ISA tax free at anytime.

That tax saving on income taken from ISAs in retirement can be considerable. But it’s worth remembering that any money you put into your ISA has had Income Tax deducted before you invest it.

Using that, combined with your personal allowance, means you can plan your retirement income tax-efficiently.
Pensioners usually pay lower Income Tax rates than they did while they were working. This means that, for many, the tax relief gained when putting money into a pension is more than the tax rate on the money taken out.

Get tax-smart before tax year-end

Using pensions and ISAs together is increasingly important for all savers.

The last few weeks of this tax year, and the beginning of the next one, provide immediate opportunities to review and rebalance your mix of ISAs and pensions, setting you up for a more financially secure future.

The value of an investment with St. James’s Place will link directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Please note that Cash ISAs, Lifetime ISAs and Innovative ISAs are not available through St. James’sPlace.

Sources:

¹Opinium surveyed just under 12,000 UK adults nationwide in two polls between May and August 2024. Quotas and post-weighting were applied to the sample to make the dataset representative of the UK adult population.
²Gov.uk, updated 4 Dec 2024

SJP Approved 02/02/2025