I am lucky enough to have a sum of money - about £40k - which I have no particular need or pressure to spend. I had been considering investing it in an index fund but one thing that concerns me is that I'm currently very close to entering the top tax bracket, where any income over £50k would be taxed at 40% plus an additional loss of child benefit for my family. If I picked up a lot of growth from my investment, it might push me over that threshold.

One way to avoid this would be to increase my pension contributions, which are taken from my salary before tax. I then realised that not only would that keep me below the additional tax threshold but that the increased contributions would also avoid the base rate of income tax, 20%.

Am I right in thinking this is essentially the same as getting a return on an investment? So that effectively I could get the equivalent of a 20% yield on my investments as opposed to the, say 10%, it might attract in an index fund, with the only downside being that I couldn't access the money until I'm older? In which case, does it make more sense to simply increase my pension contributions up to the maximum (which is essentially most of my salary) and live off the 40k for a couple of years in the meantime?

1 Answer 1


You would effectively be getting extra free money in your pension, in the form of a tax refund. But keep in mind that pensions are taxable when you do retire.

An alternative to consider is to put £20k per year into an investment ISA. You won't get the tax back when making the investment, but you don't pay tax on your earnings from an ISA when you cash it in.


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