ISA vs SIPP at the Same Net Cost: What Pension Tax Relief Is Actually Worth

What each wrapper does

A Stocks and Shares ISA and a self-invested personal pension (SIPP) both shelter investment growth from Income Tax and Capital Gains Tax. They differ in when tax relief is given and in when you can reach the money. According to GOV.UK's ISA guide, the most anyone can pay into ISAs in the 2026 to 2027 tax year is £20,000, split across account types as they choose. Money goes in from taxed income, and GOV.UK states that you do not pay tax on income or capital gains from investments in an ISA; withdrawals are tax-free at any age.

A SIPP works the other way round. Contributions get tax relief on the way in and withdrawals are taxed on the way out. The provider claims basic-rate relief from HMRC and adds it to the pot, and higher-rate and additional-rate taxpayers claim the rest through Self Assessment, as set out on GOV.UK's pension tax relief page. Relief is limited to contributions of up to 100 percent of your earnings, and total pension saving is subject to an annual allowance of £60,000. On the way out, GOV.UK's guide to tax on pensions says you can usually take up to 25 percent as a tax-free lump sum, capped at £268,275 in total, and the rest is taxed as income. The money is locked until the normal minimum pension age, which is 55 today and rises to 57 from 6 April 2028 under HMRC's policy paper on the change.

Comparing the two at the same net cost

The fair comparison is not £10,000 into each wrapper, because £10,000 in a SIPP does not cost a higher-rate taxpayer £10,000. It is the same net cost into each. Take a 40 percent taxpayer who can spare £10,000 after tax. In an ISA, £10,000 is invested. In a relief-at-source SIPP, the saver can pay in £13,333; the provider adds £3,333 of basic-rate relief, so £16,667 is invested; and the saver reclaims another £3,333 through Self Assessment. The net cost is £10,000 in both cases, but the pension starts with £16,667, which is £10,000 divided by 0.6.

Both pots then grow at the same rate, assuming the same investments and charges, so the ratio between them never changes. At withdrawal the ISA pays out in full. The pension pays out 25 percent tax-free and the other 75 percent after Income Tax at the rate that applies in retirement. The result reduces to one formula: for each £1 the ISA ends with, the pension ends with (0.25 + 0.75 × (1 − tax rate out)) ÷ (1 − tax rate in). The investment return and the number of years drop out. A 20-year horizon does not make the pension's advantage bigger than a 10-year horizon; it only makes the pound amounts bigger.

Relief rate on the way in	Tax out 0%	Tax out 20%	Tax out 40%	Break-even tax out
20% (basic rate)	1.25	1.06	0.88	26.7%
40% (higher rate)	1.67	1.42	1.17	53.3%
45% (additional rate)	1.82	1.55	1.27	60.0%
60% (Personal Allowance taper)	2.50	2.13	1.75	80.0%

Pension value at withdrawal for each £1 an ISA would hold, at equal net cost. Assumes the whole contribution gets relief at the rate shown, 25 percent of the pot is taken tax-free within the £268,275 cap, and the rest is taxed at one flat rate. The break-even column is the retirement tax rate at which the two are equal. Salary sacrifice National Insurance savings and employer contributions are not included; both would favour the pension further.

Two things stand out. First, for a higher-rate taxpayer the pension comes out ahead unless the tax rate on withdrawals would exceed 53 percent, which is above any UK Income Tax rate today. Second, for a basic-rate taxpayer the gap is small. A basic-rate taxpayer who expects to pay basic rate in retirement ends up 6 percent better off in the pension, and one who expects to pay higher rate in retirement ends up worse off. The 60 percent row applies to contributions that bring adjusted net income back towards £100,000, explained in our guide to the £100,000 Personal Allowance taper.

A worked example

Take the 40 percent taxpayer with £10,000 to invest, and assume 5 percent a year after charges for 20 years. The rate is an assumption for illustration, not a forecast, and because of the formula above it changes the pound amounts but not the ratio. The ISA grows to about £26,533. The pension starts at £16,667 and grows to about £44,222. If the saver pays basic rate in retirement, 25 percent comes out tax-free and the rest is taxed at 20 percent, leaving about £37,588, or £11,055 more than the ISA. If withdrawals are taxed at 40 percent instead, the pension leaves about £30,955, still £4,422 ahead.

Those are much smaller numbers than the headline figures that circulate for this comparison, and they depend on two conditions. The £3,333 Self Assessment refund has to be claimed, because otherwise the net cost is £13,333 rather than £10,000, and the saver needs the full £13,333 in cash until the refund arrives. And the relief has to be given at 40 percent on the whole contribution, which is only true to the extent that the saver has at least that much income taxed at 40 percent. GOV.UK's example is a £60,270 earner who pays £12,000 into a relief-at-source pension: extra relief is available on only £10,000, the slice of income that was taxed at 40 percent.

What moves the answer

Your tax rate in retirement. This is the number that decides the comparison, and it is the one you cannot know. Pension withdrawals are added to other income, including the State Pension, so a large pension can push withdrawals into the higher-rate band. On the other hand, the Personal Allowance applies to pension income, so part of each year's withdrawal can be taxed at 0 percent.

Access. ISA money is available whenever it is needed. Pension money is not available until 55, or 57 from April 2028, and taking it earlier through an unauthorised payment can mean tax of up to 55 percent, according to GOV.UK's early retirement guidance. For someone who may need the money before then, the pension's higher ratio does not help.

How the contribution is made. An employer scheme using salary sacrifice also saves employee National Insurance, 2 percent above £967 a week in 2026 to 2027, and an employer contribution or match adds money the ISA cannot. Both widen the gap in the pension's favour. From 6 April 2029, salary sacrificed above £2,000 a year will attract National Insurance, which narrows that part of the advantage.

Inheritance. Pensions have usually been left outside the estate for Inheritance Tax. HMRC's policy paper on unused pension funds says most unused pension funds and death benefits will come into scope of Inheritance Tax from 6 April 2027, with death-in-service benefits excluded. A pension held partly as an inheritance vehicle will be treated differently from that date.

The tax-free cash cap. The 25 percent tax-free lump sum stops at £268,275, which is 25 percent of about £1.07 million. Above that, every extra pound of pension is taxed on the way out, and the "tax out" column in the table becomes the full rate rather than 75 percent of it.

Changes to ISAs from April 2027

A tax information and impact note published by HMRC on 17 September 2026, Reduction in the cash ISA limit, confirms that from 6 April 2027 the annual cash ISA limit for people under 65 falls to £12,000 within the overall £20,000 limit. People aged 65 or over keep a £20,000 cash limit. The note also introduces anti-avoidance rules, including restrictions on transfers from stocks and shares ISAs into cash ISAs and a flat 22 percent charge on interest paid on cash held inside a stocks and shares ISA. None of this changes the Stocks and Shares ISA side of the comparison above, which assumes invested money, but a saver who holds a large cash balance inside a Stocks and Shares ISA will be affected.

The Lifetime ISA as a third option

For savers aged 18 to 39, the Lifetime ISA sits between the two. You can pay in up to £4,000 a year until age 50, and the government adds a 25 percent bonus, up to £1,000 a year. The £4,000 counts towards the £20,000 ISA limit. Withdrawals are tax-free for a first home costing £450,000 or less, from age 60, or in terminal illness. Any other withdrawal carries a 25 percent charge on the whole amount withdrawn, which recovers the bonus and takes a little more: £800 saved becomes £1,000 with the bonus, and withdrawing it early leaves £750.

At equal net cost, a Lifetime ISA held to 60 gives a ratio of 1.25 against a plain ISA, with no tax on the way out. That beats a pension for a basic-rate taxpayer who expects to pay basic rate in retirement (1.06), and falls short of a pension for a higher-rate taxpayer (1.42), before any employer contribution. The government's June 2026 First Time Buyer ISA consultation says a new product will be offered in place of the Lifetime ISA once it is available; the rules above are those on GOV.UK today.

Frequently asked questions

Is a SIPP better than an ISA for a higher-rate taxpayer?

At equal net cost, a 40 percent taxpayer who pays basic rate in retirement ends up with about 1.42 times what an ISA would hold, and 1.17 times if withdrawals are taxed at 40 percent. The pension only falls behind if the tax rate on withdrawals would exceed about 53 percent. The trade-off is access: pension money cannot normally be taken before 55, or 57 from April 2028, while ISA money can be withdrawn at any time.

Does a longer time horizon make the pension's advantage bigger?

Not in proportion. When both wrappers hold the same investments, the pension's advantage is a fixed ratio set by the tax relief on the way in and the tax on the way out. A longer horizon makes the pound difference larger because both pots are larger, but the ratio is the same after 10 years as after 30.

How much tax-free cash can I take from a pension?

Usually up to 25 percent of the amount built up, with the most you can take capped at £268,275 unless you hold a protected allowance. The rest is taxed as income when you take it, and the Personal Allowance applies to that income.

What changes to ISAs are coming in April 2027?

From 6 April 2027, people under 65 can pay at most £12,000 a year into cash ISAs, within the unchanged £20,000 overall limit. People aged 65 or over keep a £20,000 cash limit. Interest on cash held inside a Stocks and Shares ISA will be charged at a flat 22 percent under the accompanying anti-avoidance rules.

Will pensions be subject to Inheritance Tax?

HMRC's policy paper says most unused pension funds and death benefits will come into scope of Inheritance Tax from 6 April 2027, while death-in-service benefits paid from a registered pension scheme will be excluded. Personal representatives will be responsible for reporting and paying any tax due.

Sources

• GOV.UK, Individual Savings Accounts (2026 to 2027 allowance)
• GOV.UK, Tax on your private pension contributions: tax relief and annual allowance
• GOV.UK, Tax when you get a pension (tax-free lump sum and £268,275 cap)
• HMRC, Increasing normal minimum pension age (55 to 57 from 6 April 2028)
• GOV.UK, Early retirement, your pension and benefits
• HMRC, Inheritance Tax: unused pension funds and death benefits (November 2025)
• HMRC, Cash ISA limit reduction (September 2026)
• GOV.UK, Lifetime ISA and First Time Buyer ISA consultation (June 2026)