Pension vs Mortgage: Where Should Your Spare £100 Go?

01 Why tax relief decides it before growth ever does

Both options are good, which is what makes this hard. A spare £100 either reduces a debt at a guaranteed rate or enters a pension with tax relief and possibly an employer contribution attached.

The mortgage side is easy to value precisely. Every pound overpaid saves your interest rate, guaranteed, and that saving is tax-free — so a 5% mortgage rate is worth about 8.3% gross to a higher-rate taxpayer. There is no risk, no volatility and no dependence on anyone's forecast.

The pension side starts further ahead than it appears. £100 of take-home pay becomes £125 in a relief-at-source pension for a basic-rate taxpayer, or £167 for a higher-rate one once the additional relief is claimed. If an employer matches, it can be £250 or more. That uplift happens before any investment return and is not a forecast — it is arithmetic.

Against that, the pension is locked until 57 and 75% of it is taxed on the way out, while the mortgage overpayment is certain and permanently reduces the largest fixed cost most households carry.

So the comparison is not risk against return. It is a guaranteed tax-free return you can reach against a larger, partly guaranteed uplift you cannot — and which one wins depends on your rate, your band, and when you need the money.

A pension contribution starts ahead because the government tops it up before a penny is invested. A £100 net contribution from a higher-rate taxpayer becomes £167 in the pot once relief is claimed in full — £25 added automatically as basic-rate relief on the £125 gross, plus a further £25 reclaimed through your tax return.

A mortgage overpayment has no such top-up. £100 off the balance is £100 off the balance. So before we even talk about investment growth or mortgage rates, the pension is working with £167 against the mortgage's £100. That 67% head start is the single biggest factor in the decision, and it's the one a straight rate-versus-rate comparison leaves out.

Source: GOV.UK — Tax relief on private pension contributions · HMRC PTM044100

02 The employer match is the real free money

If your employer matches contributions, that match beats any mortgage rate you will ever have. Under auto-enrolment the legal minimum is 3% employer on qualifying earnings, but many schemes match pound-for-pound up to 5% or 6% — and a pound-for-pound match is an instant 100% return on the matched portion, before tax relief and before growth.

No mortgage overpayment competes with that. A 5% or 6% guaranteed saving is good; a 100% match is in a different universe. This is why the first rule is mechanical: capture the full match, every year, before any overpayment debate begins. Tom's employer matches up to 5% of salary and he was only contributing 4% — he'd been leaving roughly £600 a year of free money on the table while diligently overpaying his mortgage.

Source: GOV.UK — Workplace pensions: what you, your employer and the government pay

03 Tom's spare £300: the worked example

On Tom's numbers the pension produces more than three times the first-year benefit of the overpayment, and the gap compounds. He has £300 a month spare, a 5% mortgage, and pays 40% tax. Overpaying saves him his mortgage rate; contributing grosses the money up by relief and then grows it.

Default case: £300/month is £3,600 a year. Overpaying a 5% mortgage saves £180 of interest in year one. The same £3,600 at 40% relief becomes £6,000 in the pension; growing at a modest 5% that's £300 in the first year alone — and that pot keeps compounding tax-free, with a quarter of it available tax-free from age 55. The overpayment's £180 is real and certain; the pension's lead is larger and grows.

04 The two cases where the mortgage wins

The mortgage is the right home for the money in exactly two situations, and Tom is in neither. First, when your rate is high and you have no match: a basic-rate taxpayer with a 6.5% mortgage and no employer match faces a near-even fight, and the guaranteed, risk-free saving can edge it — especially if market volatility would cost you sleep. Second, when the mortgage term ends before you can touch the pension: money in the pension is locked until the normal minimum pension age (55 now, 57 from 2028), so if clearing the mortgage at 60 is the goal and the pension can't be accessed in time, the overpayment does a job the pension can't.

Outside those cases — higher-rate relief, an employer match, a rate under about 5%, and years for growth to run — the pension wins, and the margin widens the longer the money compounds.

05 The order I'd actually do it in

Do it in this order and you never have to agonise over the marginal pound. Capture the full employer match first — it's the highest-return move available to you. Hold three to six months of expenses in an emergency fund so an overpayment never traps cash you need. If you're a higher-rate taxpayer, keep feeding the pension up to the point where relief drops to basic rate. Then, and only then, split anything left between pension and mortgage according to how much you value guaranteed debt reduction versus tax-advantaged growth.

Tom moved his contribution up to capture the full match, kept his emergency fund, and redirected the rest of the overpayment into the pension. The mortgage will be a few months later than it would have been; his projected retirement pot is materially larger.