Pay off the mortgage or pay into the pension?

Take every pound of employer matching first; nothing beats free money. After that it is closer than most people think. Tax relief turns £500 of take-home pay into £694 for a basic-rate taxpayer and £862 for a higher-rate one, but if you would put the freed-up money into the pension once the mortgage is gone, that relief is available either way. What then decides it is the mortgage rate against the return you expect after charges, and how much you value a guaranteed result. Below about 5% the pension usually edges it; above, overpay.

Figures for the 2026/27 tax year · Published 4 October 2026

It is the question every spare £500 a month raises. The two options feel similar, a debt shrinking or a pot growing, but they are taxed completely differently, and that difference is where to start.

The tax relief is immediate

Overpaying the mortgage uses money that has already been taxed. Paying into a pension uses money that has not. If your employer offers salary sacrifice, giving up £500 of take-home pay puts the following into your pension:

• Basic-rate taxpayer: £694. You save 20% income tax and 8% National Insurance on the gross amount.
• Higher-rate taxpayer: £862. You save 40% income tax and 2% National Insurance.
• Earning between £100,000 and £125,140: more again, because each pound sacrificed also restores 50p of personal allowance. The effective relief is 60% plus NI, and this is the strongest case for the pension anywhere in the tax system.

Without salary sacrifice the figures are a little lower (£625 and £833, as the NI saving is lost and higher-rate relief has to be claimed through a tax return), but the shape is the same. The pension starts 39% to 72% ahead on day one. The mortgage overpayment starts level.

That looks decisive. It is not quite, because of what happens after the mortgage is cleared.

A worked example with real numbers

Dan is 40, has a £200,000 mortgage at 4.5% with 20 years to run (£1,265 a month) and £500 a month spare. Two routes, each for 20 years.

Route A: overpay the mortgage, then pivot. With £500 a month extra the mortgage is cleared in 12 years and 4 months instead of 20, saving £42,800 of interest. For the remaining 7 years and 8 months Dan puts the whole freed-up £1,765 a month into the pension, with the same tax relief.

Route B: pension from day one. The £500 goes into the pension via salary sacrifice every month for 20 years, and the mortgage runs its course.

Assuming the pension grows at 5% a year after charges:

• Basic-rate taxpayer: Route A ends with a pension of about £275,000. Route B ends with about £287,000. Both have a cleared mortgage at 60.
• Higher-rate taxpayer: Route A about £342,000; Route B about £356,000.

Pension-first wins, but only by £11,000 to £14,000 over twenty years. The reason the day-one advantage shrinks is that Route A gets the same relief later, on a much bigger monthly amount. So the result is really a contest between 5% growth and a 4.5% mortgage, and it flips easily:

• At a mortgage rate of 6% and the same 5% growth, overpaying wins by around £19,000 to £23,000.
• At 4.5% and 4% growth, overpaying wins by around £9,000 to £11,000.
• With employer matching on the pension that is not yet maxed, the pension wins by a mile at any sensible interest rate.

And remember the pension is taxed on the way out. A quarter comes out tax-free; the rest is taxed as income, at 20% for most retirees. Taking that off, Route B’s £287,000 is worth about £244,000 in hand, Route A’s £275,000 about £234,000. The gap survives, but it narrows.

When the tax relief really does decide it

The example assumed Dan gets the same relief in year 15 as in year 1. Often that is not true, and then the day-one advantage is real:

• You pay higher-rate tax now and may not later. A career wind-down, part-time work or a move to a lower-paid job turns 42% relief into 28%. Relief claimed today is locked in.
• You are in the £100,000 to £125,140 band now. Every pound into the pension while you are there effectively costs 38p to 40p. Few people stay there for twenty years.
• You would not actually pivot. Most people who clear the mortgage early spend some of the freed-up money. If that is honestly you, the pension route wins comfortably, because the relief is only banked on the money that goes in.
• The rules may change. Pension tax relief has been reviewed by every government for a decade. Relief taken now is certain; relief available in 2040 is not.

What the maths does not capture

• Certainty. Paying 4.5% off a mortgage is a guaranteed, tax-free 4.5% return. A pension’s 5% is a hope, and some ten-year stretches deliver far less. If a guaranteed 4.5% would let you sleep, that is worth something the spreadsheet cannot price.
• Access. Pension money is locked until 55 now and 57 from April 2028. Mortgage overpayments are not exactly accessible either, but a cleared mortgage cuts your outgoings for good, which is a form of freedom. If you might want to change career, go part-time or stop early, the lower monthly bill is the thing that lets you.
• Inheritance tax. From April 2027 unused pension funds count as part of your estate. The old advice to leave the pension untouched for the children is weaker than it was; our guide to the change has the detail.
• Rate risk. A fix ending in two years at 4.5% might be 5.5% next time. Overpaying now shrinks the balance that will be repriced. Many lenders allow 10% of the balance a year without penalty; check yours.
• Annual allowance. Pension contributions are capped at £60,000 a year (less for very high earners), with unused allowance from the previous three years available. Few people overpaying a mortgage are anywhere near it, but if a bonus is in play, check.

An order of priorities

• 1. Employer match. If your employer matches up to 5% and you pay 3%, raise it. A 100% return on day one is not available anywhere else.
• 2. Expensive debt. Credit cards, car finance, anything above about 7%. Clear it before either of the main options.
• 3. An emergency fund. Three to six months of spending in cash. Neither the pension nor the house can be sold in a week.
• 4. Pension, if you pay higher-rate tax now, especially between £100,000 and £125,140, or if your mortgage rate is below about 5%.
• 5. Mortgage overpayments, if your rate is above about 5%, your tax band is not going anywhere, or you want the option to stop work before 57.

In practice most people split the £500: enough into the pension to take all the higher-rate relief available, the rest off the mortgage. The right split depends on your rate, your tax band and how much you value being debt-free, which is why it is worth running both as plans rather than guessing.

The short version

Employer match first. Then the pension if you pay higher-rate tax now or your mortgage is cheap; the mortgage if it is dear or you want to be free of it early. If the choice keeps you awake, overpay the mortgage: a plan you will stick to beats a slightly better one you abandon.