Overpay the mortgage, or pay into the pension?
How tax relief, a guaranteed mortgage saving and an employer or company contribution change the answer on £500 a month.
How tax relief, a guaranteed mortgage saving and an employer or company contribution change the answer on £500 a month.
Four things decide it: whether there's employer or company money on the table you're not claiming, whether your tax rate now is higher than the one you'll pay in retirement, how your mortgage rate compares with a cautious growth assumption, and how much a guaranteed, debt-free date matters to you.
Comparing a 5% mortgage rate with 3% real growth leaves out two parts of the sum: tax relief on the way in and income tax on the way out.
A pension contribution starts with an immediate, guaranteed uplift from tax relief before a single pound is invested: 25% for a basic-rate taxpayer, more for higher and additional rate. A mortgage overpayment has no day-one uplift.
Up to 25% of the pot can come out tax-free, and the rest is taxed as income when it's drawn. A fair comparison looks at what is left after both taxes.
Pension money is locked until you reach normal minimum pension age: 55 now, rising to 57 in April 2028. Money paid into the house is also locked, as equity you can't spend without selling or borrowing against it.
Overpaying the mortgage buys a return exactly equal to the rate, guaranteed, because every pound wipes out interest that would otherwise have been charged. A pension's growth isn't guaranteed. The tax relief is the only guaranteed part of the pension side, so it belongs in the sum.
Priya is 53, runs a small design studio, and has £500 a month she could put either way. £180,000 left on her mortgage, 5.1%, twelve years to run, monthly payment around £1,675. She's a higher-rate taxpayer once salary and dividends from the business are added together.
An extra £500 a month clears it in 103 months instead of 144 — three and a half years early — and saves roughly £18,700 in interest. The saving is guaranteed because it isn't exposed to markets.
As a higher-rate taxpayer, £500 net automatically becomes £625 gross in the pension, and she can reclaim a further £125 a month through her tax return. Her real out-of-pocket cost falls to £375 a month for £625 landing in the pot.
At 3% real growth, the standard working assumption printed on every Buzz plan, that £625 a month builds to roughly £73,000 before tax, for a true cash cost over the period of about £38,600.
Taking 25% tax-free and paying basic-rate tax on the rest leaves Priya roughly £62,000 of that £73,000. Her outlay is nearly £13,000 lower than the mortgage route's £51,500, which saves a guaranteed £18,700.
For a higher-rate taxpayer with no employer match at stake, the tax relief on the way in outweighs a 5.1% mortgage rate, even allowing for tax on the way out and a growth rate that isn't guaranteed. This is arithmetic and is not a recommendation. The result moves when the tax rate drops from higher-rate to basic-rate, because the relief that put the pension route ahead is the first thing to shrink.
If an employer matches contributions up to a certain percentage and you're paying in less than that, the unclaimed match is a guaranteed return that no mortgage rate comes close to. It comes before either side of this comparison.
For an owner-director it works differently again. A contribution the company makes directly into a pension is deductible against the company's own corporation tax and isn't liable to National Insurance either side. The same money extracted as a dividend first is taxed as a dividend before it reaches a personal bank account or a mortgage overpayment. The difference can be sizeable. The exact figures depend on the company's profit level and its existing salary and dividend split, and your accountant can work them out.
An unclaimed employer or company match. A meaningfully higher tax rate now than you expect in retirement. Headroom left in this year's £60,000 annual allowance that would otherwise go unused. Plenty of years left before you'd want to touch either pot.
A rate that's unusually high against a cautious growth assumption. A strong preference for being guaranteed debt-free by a specific date, especially one close to when you plan to stop working. Already using most of this year's pension allowance. A basic-rate tax position now with no clear sign that it'll be lower later.
With no emergency cash, money locked in a pension or a mortgage can't cover a broken boiler or a lost contract, and that forces expensive borrowing. A few months of spending held somewhere accessible comes first.
Splitting £500 as £300 mortgage and £200 pension, or the other way round, is a reasonable answer when the arithmetic comes out close.
Two facts turn this into arithmetic: your marginal tax rate today, and whether an employer or company match is sitting unclaimed. With those, run the comparison on your own mortgage balance and rate.
The free projection shows what either route does to the age your money runs out, on your own figures. If you plan to clear the mortgage later with tax-free cash, the tax-free cash guide covers that version of the question. If the mortgage, the pension, a business and an unfixed stop date are all moving at once, the Financial Plan brings them into one projection with UK tax applied year by year.
Yes, in one specific case: an unclaimed employer or company pension match. If your employer adds money on top of what you contribute and you're paying in less than the level needed to get the full match, that money goes unclaimed. The match is a guaranteed uplift that no mortgage rate can compete with, and in this comparison it is the one part that isn't close. Once the match is fully claimed, the answer depends on your tax rate, your mortgage rate, how much allowance headroom you have left this year, and how you weigh a guaranteed outcome against one that isn't.
The relief is smaller, so the comparison is closer, and for some people it tips the other way entirely. A basic-rate contribution still gets a 25% uplift from relief. That is roughly half the day-one boost a higher-rate taxpayer gets, and there's no self-assessment reclaim adding to it. Run Priya's worked example at basic rate and the pension route's £73,000 pot costs closer to £500 a month in real terms, up from £375, which narrows the gap against the mortgage's guaranteed £18,700 considerably. If you expect to stay basic-rate in retirement too, the gap between tax relief going in and tax paid coming out shrinks further.
It usually strengthens the case for the pension, sometimes considerably, because a contribution the company pays in directly avoids both the dividend tax and the National Insurance that extracting the same money as salary or dividends first would trigger. How much that's worth depends on your company's profit level, its corporation tax position, and how you currently split salary and dividends. The free projection shows what either route does to your own lifetime figures. Your accountant can work out the most efficient way for your company to get money into a pension.
Yes. Splitting £500 a month as £300 towards the pension and £200 towards overpaying the mortgage, or any other split, is reasonable, particularly if the arithmetic on your own numbers comes out close between the two routes. Check first that any employer or company match is fully claimed, because that part of the decision isn't close. After that, a split means you aren't relying on one growth assumption or one interest rate holding still for a decade. It also keeps both a falling mortgage balance and a growing pension in your projection.
Only up to your available allowance, and only if the tax relief still makes sense doing it that fast. The standard annual allowance is £60,000, and you may have unused allowance carried forward from the previous three tax years if you didn't use it at the time. Beyond that limit, extra contributions stop attracting relief and become considerably less attractive, at which point overpaying the mortgage or saving outside a pension usually makes more sense for anything above it. Below the allowance, the limit is how much is spare each month once spending, and any debts more expensive than the mortgage, are accounted for.
Start with two facts: your marginal tax rate today, from a payslip or your last tax return, and your mortgage's rate and remaining term, from your last annual statement. Then check whether an employer or company match is sitting unclaimed, because that changes the calculation before anything else is considered. With those three things you can run the comparison shown above on your own numbers, and the free projection will show what either route does to the age your money runs out. If several parts are pulling against each other at once, the Financial Plan brings them into one projection.
An hour with a planner on whether the Financial Plan suits your position.
A written plan: every year to age 100 with UK tax applied, each risk measured in years, and your next ninety days.