Understanding tax efficiency: Pension and ISA

When it comes to building wealth, it is important to understand the tax efficiency of different investment vehicles. A pension offers tax relief on contributions, meaning that the money you put in effectively costs less. For example, a 40% taxpayer will only pay £750 to contribute £1,000 to a pension. However, on the other hand, withdrawals from a pension are subject to tax. On the other hand, an ISA (Individual Savings Account) does not offer tax relief on contributions, but any growth or withdrawals from the account are tax-free. Each person has an annual ISA allowance of £20,000. It is crucial to consider your future plans, income, and tax levels when deciding between a pension and an ISA.