Using pensions to save capital gains tax

The burden of Capital Gains Tax (CGT) is increasing. The top rate of CGT on the disposal of non-business assets increased from 20% to 24% on 30 October 2024. This rate applies to gains that fall into the higher rates of income tax when added to the individual’s taxable income. At the same time, the rate applying to gains falling into the basic rate income tax band increased from 10% to 18%.

These changes brought the rates of CGT in line with those applying to residential property, effectively removing the surcharge that previously applied on the disposal of residential property.

Changes to business asset disposal relief and investors’ relief

The rate applying on the disposal of business assets, where business asset disposal relief (BADR) is available, increased from 10% to 14% on 6 April 2025 and will further increase to 18% from 6 April 2026.

Similarly, the rates where investors’ relief applies increased from 10% to 14% on 6 April 2025 and will increase to 18% from 6 April 2026. The lifetime allowance for investors’ relief reduced from £10 million to £1 million on 30 October 2024.

Not only that, but the CGT annual exempt amount for individuals has reduced from £12,300 in 2022-23 to £3,000 in 2024-25 and 2025-26. The annual exempt amount for trustees has reduced from £6,150 to £1,500 over the same period.

The bottom line is that more and more individuals and trustees are being drawn into the CGT net. It is therefore even more important to take planning action, where possible, to reduce and mitigate the impact of the tax.

Using tax-efficient and CGT-deferred investments

Individuals should consider the benefits of investments that are not subject to CGT, such as ISAs, investment bonds and pensions, investments that can defer the payment of CGT such as EIS* and, for those who are married or who have a civil partner, some independent tax planning. This can maximise the use of each £3,000 annual exempt amount and, sometimes, reduce the rate of CGT applying to gains.

As mentioned above, the rate of CGT payable is linked to the taxpayer’s marginal rate of income tax. In effect, in 2025-26, any taxable capital gains are added to the individual’s taxable income and, for gains on non-business assets that fall within the basic rate income tax band, are taxed at 18%. Where they fall into the higher rate income tax bands, the gains are taxed at 24%.

Reducing CGT through pension contributions

Those who are subject to the 24% higher rate of CGT, and who are able to make an additional member contribution into a pension, have an opportunity to save CGT. Married couples also have a similar opportunity if one partner can make a pension contribution into their spouse’s pension.

Depending on the type of pension scheme, member pension contributions have the effect of either reducing the individual’s taxable income (e.g. occupational pension schemes) or ‘stretching’ the individual’s income tax bands (e.g. ‘relief at source’ personal pensions). In both cases, some or all of the capital gain that would otherwise have been subject to the 24% CGT higher rate may, as a result of the additional pension contribution, suffer CGT at the lower rate of 18%.

Example – Frank

Frank, who is single, has just sold some shares which have realised a capital gain of £8,000 in 2025-26. After deduction of the CGT annual exempt amount of £3,000, this leaves a £5,000 taxable capital gain.

Frank’s taxable income (i.e. after deduction of his personal allowance) in 2025-26 is £38,500, which exceeds the basic rate income tax band threshold of £37,700, so all of this taxable capital gain would be subject to CGT at 24% giving rise to a CGT charge of £1,200.

Using funds he has on deposit; Frank pays an additional contribution of £5,000 into his personal pension. This equates to a gross pension contribution of £6,250, after grossing up by basic rate income tax, and has the effect of stretching his basic rate income tax band threshold from £37,700 to £43,950.

Frank’s taxable income now falls within the basic rate income tax band, meaning he has reduced his income tax liability by £160. The net cost of his additional gross pension contribution of £6,250 is now £4,840.

Adding the taxable capital gain of £5,000 onto Frank’s taxable income of £38,500 means that the whole taxable gain now falls into Frank’s stretched basic rate income tax band and so is liable to CGT at 18%, giving a liability of £900, a saving of £300.

Taking account of this CGT saving, Frank’s effective net cost of his additional gross pension contribution of £6,250 is now £4,540. Frank’s effective rate of tax relief on the pension contribution is 27.4%.

By making the additional pension contribution, Frank has not only reduced his liability to income tax and capital gains tax but has also boosted the value of his pension fund.

If you or someone you know would like some guidance in this area, get in touch and arrange a free initial consultation.

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*EISs are classified as to be high-risk investments, and as such are not suitable for all investors. There is a chance that all of your capital could be at risk and you should not invest into these types of plans without seeking expert advice from a reputable firm of independent advisers such as The Private Office.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The information in the article is based on current laws and regulations which are subject to change as at future legislations. 

The information in this article is correct as at 15/01/2026.

The Financial Conduct Authority does not regulate tax advice.