Pension or ISA?

How it works

You say how much you’d give up from your take-home pay. The calculator works out what that becomes in a pension — topped up by tax relief, and by your employer if they match it — and in an ISA, where it goes in as it is.

Both grow at the same rate above inflation (2.6%, 3.9% or 5.1% a year, depending on the mix) for the years until you’d spend it. The pension is then taxed on the way out: a quarter tax-free and the rest at the rate you pick for retirement. The ISA is tax-free throughout.

Paying in from take-home pay (relief at source), you pay 80% and the pension adds 20%; if you pay higher-rate tax you claim the rest back on a tax return, and the calculator counts that. Through salary sacrifice, your employer pays it in before income tax and National Insurance, so the same cost to you buys more pension.

The UK rules it uses

• ISA allowance: £20,000 a year, across all your ISAs. From 6 April 2027, if you’re under 65, no more than £12,000 of that can go into cash ISAs.
• Pension tax relief at your top rate of income tax — 20%, 40% or 45% — with the 2026/27 bands, including the lost personal allowance between £100,000 and £125,140.
• Tax-free cash: a quarter of the pension, up to £268,275 in all.
• Pensions can normally be drawn from 55, rising to 57 from April 2028. An ISA can be used any time.
• From April 2027, pensions left when you die are due to count towards inheritance tax; ISAs already do.

A worked example

Say you give up £200 a month (£2,400 a year) on a £45,000 salary, for 25 years, with a balanced mix, and expect to be a basic-rate taxpayer in retirement.

In the pension, tax relief turns £2,400 into £3,000 a year. It grows to about £123,000; after the tax-free quarter and 20% tax on the rest, that leaves about £105,000 to spend. The ISA grows to about £99,000, all tax-free — so the pension leaves about £6,000 more.

Through salary sacrifice, about £3,333 a year goes in for the same £2,400, and the pension leaves about £116,000. If you’d pay higher-rate tax in retirement, though, the ISA comes out ahead.

Questions people ask

When does the ISA win?

When you get basic-rate relief going in but pay higher-rate tax coming out. And an ISA can be used at any age, which the figures don’t show — a pension is locked until 57 from 2028.

What if my employer matches what I pay in?

A match is extra money you only get by paying into the pension, and it usually outweighs everything else here. Put it in the ‘extra from your employer’ box to see the difference.

Is salary sacrifice always better?

It saves National Insurance as well as income tax, so it usually buys more pension for the same cost. It lowers your salary on paper, which can matter for things like mortgage applications, and the government has announced plans to limit the National Insurance saving from April 2029.

Can I use both?

Yes — many people do: a pension for the long-term tax relief, and an ISA for flexibility and for the years before pensions can be drawn. The full plan shows how the two work together.