It’s worth thinking about doing this because a pension is a tax-efficient way to invest your money.
Your pension provider will invest your funds in different shares and bonds, similar to a stocks and shares ISA.
A key difference between investing in a pension compared to an ISA is that you can potentially pay more into a pension than an ISA. However, you’ll need to reach the normal minimum pension age to receive the money from a pension. This age is 55 at the moment but will increase to 57 from 6 April 2028.
If you have the money to spare, increasing your pension contributions could be a good way to grow your pension pot.
However, before you increase your pension contributions, you might like to consider whether you can still meet other financial goals. For example, you might think about whether paying more into your pension might mean you can no longer pay off debts or afford everyday expenses.
If you do decide to increase your pension contributions, there are a few benefits.
By putting more money into your workplace pension, you may get more contributions from your employer.
Tax relief on your pension means that, if you're a basic rate taxpayer, the income tax you'd normally pay goes towards your pension instead.
This happens in one of 2 ways:
For higher and additional rate taxpayers, relief isn’t added to the pension but will reduce your tax liability once claimed from HM Revenue & Customs.
Once your pension provider invests your contributions, there’s no limit on any investment growth within the fund. You don’t pay capital gains tax on any gains or income tax on any interest.
How much you want to contribute to your pension is up to you, but what receives tax relief will be limited by relevant UK earnings and the annual allowance. Generally, the amount you contribute will depend on:
The earlier you start contributing, the more time your money has to grow.
But if you’re closer to retirement or plan to retire early, you might want to contribute more to make sure you can support your post-retirement lifestyle.
It’s also important to keep in mind that you have a pension annual allowance. You may have to pay tax if your total contributions are above £60,000, including those paid by the employer, plus tax relief.
For workplace pensions, the total minimum pension contributions are 8% of your qualifying earnings. In the 2024/2025 tax, that's earnings that fall between £6,240 and £50,270. By law, your employer must pay 3% of this, with you paying in the remaining 5%. That 5% includes tax relief so it’s 4% net.
Depending on your pension scheme, your employer can choose to contribute more.
You can also boost your pension through salary sacrifice. This means your salary will be less, but your employer’s contributions to your pension will go up. You'll also pay less in income tax and national insurance contributions.
A defined contribution pension is a way of building up a pension pot as you pay into it over your working life. Your money is invested with the aim of growing ahead of your retirement.
It’s different to a defined benefit pension, which gives you a retirement income based on your salary or career average earnings.
If you plan to increase your pension contributions, consider how much you can realistically afford to put away. By evaluating your finances and creating a plan, you can build and improve your financial future.
