Pension vs ISA tax comparison calculator

Under relief at source the provider reclaims basic-rate relief, so a £8,000 net payment becomes a £10,000 gross contribution, and the basic and higher-rate limits extend by the gross amount — giving higher and additional-rate relief through Self Assessment (FA 2004 s.192(4)). Because the contribution reduces adjusted net income, it can also reinstate a tapered personal allowance (ITA 2007 s.35). On the way out, normally 25% is tax-free within the lump sum allowance and the balance is taxed as non-savings pension income at the marginal rate in the year it is drawn.

ISA subscriptions come from taxed money — there is no relief on the way in, and subscriptions are limited to £20,000 a year per person (ISA Regulations 1998, reg 4ZA). Inside the wrapper, interest, dividends and gains are exempt from income tax and capital gains tax, and withdrawals are not taxable income. The ISA column of the calculator is therefore unchanged in both directions: the amount in equals the cost, and the amount out equals the proceeds.

Unwrapped holdings are taxed annually. Interest is savings income, set against the personal savings allowance and any starting rate for savings before the marginal rate applies; dividends are taxed at the dividend rates above the dividend allowance; and realised growth is subject to capital gains tax after the annual exempt amount. The calculator’s GIA line takes the year’s interest and dividends at the margin above your other income, with the allowances applied by the engine — a disposal’s CGT comes on top and is not part of the annual drag line.

An investment bond is a non-qualifying life policy, so the holder pays no personal tax year to year and can withdraw up to 5% of the premium each policy year with the tax point deferred (ITTOIA 2005 ss.507–509). On full surrender, death or maturity the gain is a chargeable-event gain taxed as savings income at the marginal rate, with top-slicing relief (s.535–537) moderating the effect of a multi-year gain landing in one tax year. An onshore bond carries a deemed basic-rate credit for tax paid inside the fund against the holder's real liability, and an offshore bond does not. That is the main source of the difference in the net tax: the offshore tax is usually higher. The gap is often close to the credit amount, because the credit is set against the year's whole income tax after top-slicing relief, including tax on other income; it is smaller, or nil, only where the credit is more than that tax, because the excess cannot be repaid (ITTOIA 2005 s.530(2)). It can also be smaller or larger where the personal allowance is set against income differently (ITA 2007 s.25(2)) or, with dividends, where the gain sits in a different place in the band order. The signed-in wrapper comparison shows the extra tax the gain causes and never shows less than nil, so where the onshore credit also covers tax on other income, the difference between the onshore and offshore figures is smaller than the real one. Inside the relief calculation itself the position is the opposite: s.531(1) is an express carve-out applying the same s.530(1) credit to offshore and foreign policy gains for the purpose of calculating relief under s.535, so the top-slicing relief figure is identical for the two bond types. The credit is also restricted under s.530(3)–(5) to basic rate on the gain (or slice) less any personal allowance set against it — not a flat 20% of the gain.

Tax is one input among several, and the calculator states its fence honestly: a pension is inaccessible before normal minimum pension age (FA 2004 s.279 — 55, rising to 57 from April 2028) while an ISA and a GIA are not; employer contributions and matching sit outside the figures; product and adviser charges differ by wrapper; the annual allowance sets how much can go into a pension in a year before a tax charge applies (FA 2004 s.227–228); and death benefits are treated differently across the four wrappers (IHTA 1984). None of these appears in the tax columns — they are stated so the columns are read for what they are. The tax-relief limit does appear: relief is given only on contributions up to the greater of your relevant UK earnings and £3,600 a year (FA 2004 s.190). Pension, savings and rental income are not relevant UK earnings (furnished holiday lettings profits were, up to 2024-25), and leaving Relevant UK earnings blank limits the contributions relieved to £3,600 gross.