If you are a top rate tax payer does it still make sense to pay money into a pension after your ISA limit has been reached?

28 April 2023

Question by Fred

If you are a top rate tax payer does it still make sense to pay money into pension after ISA limit has been reached?

Answered by Holly Mackay

If you’re a top rate taxpayer then pensions are your best friend! They are much more powerful for you than a basic rate taxpayer. Why? The government basically refunds you the tax you have paid on income, if you put this into a pension. It’s called ‘tax relief’.

There are all sorts of Ts and Cs with pensions so read up, but with tax thresholds frozen, and more and more people being hoiked into top rate bands, paying into a pension is really compelling.

For example, if you pay tax at 40% and you put £800 into a pension, your pension provider will immediately add £200 - so BING, you see £1,000 in the account. And then BANG in your annual tax return, you can reduce your annual income by another £200. This can also be a brilliant thing to consider if you’re a borderline top rate tax payer – could pension contributions bring your annual income DOWN and so stop you from ticking over into the top band?

ISA versus a pension is a tough one – and quite often paying into both makes sense. ISAs for shorter-term stuff or where you need the money before your mid to late 50s. But if it’s longer term money then pensions can be fantastically helpful and sensible for top rate taxpayers.

My suggestion? Find out more – absolutely sounds like a sensible thing to at least consider. Depending on timeframes could even be more sensible than ISAs because of the nice government top ups you get.


Answered by

Holly Mackay

Founder and CEO of Boring Money

I’ve worked in investment markets for over 20 years. I started out at Merrill Lynch Investment Management and worked at a few big names before setting up my first business in 2008.