Making pension contributions to reduce capital gains tax

A profit on an investment can feel like a win right up until the tax bill lands.

Whether the gain comes from selling investments, disposing of a second property, or planning around a business exit, the question is the same: how do you keep more of the value without making short-term decisions that work against the bigger picture?

One planning route worth looking at is pension funding.

One pension contribution won’t wipe out capital gains tax directly. But in the right circumstances, it can reduce your taxable income, preserve more of your basic rate band, and mean more of a gain is taxed at 18% rather than 24%. More importantly, it can turn a tax problem into a planning opportunity.

Can pension contributions reduce capital gains tax?

Yes, though not directly.

A pension contribution doesn’t reduce the gain itself. You can’t simply offset a pension payment against a capital gain and watch the tax disappear.

What a pension contribution can do is reduce the amount of taxable income that sits alongside that gain. Because capital gains tax rates depend on how much of your basic rate band is still available after income is taken into account, that can mean more of the gain falls into the lower CGT rate. HMRC explains this in its guidance on Capital Gains Tax rates and rates and allowances.

That’s the real planning point.

How the strategy works

The logic is pretty simple:

• You make a pension contribution.
• That contribution may attract tax relief, subject to the rules.
• It can then extend your basic rate band for income tax purposes.
• And that may mean more of your capital gain is taxed at 18% instead of 24%.

That’s why the strategy can be useful in years where you have:

• a one-off gain
• income close to a threshold
• unused pension allowance
• a wider planning goal around retirement, extraction or a future business exit

This is also why it needs context. The value isn’t in chasing a tax trick. It’s in making one decision support the wider plan.

Here’s how it works in practice

Let’s say your taxable income has already used most of your basic rate band.

You then realise a capital gain above the £3,000 annual exempt amount. Without any planning, more of that gain may end up taxed at 24%. But if you make a pension contribution and qualify for tax relief, you may be able to preserve more of your lower-rate band so that a larger slice of the gain is taxed at 18% instead.

HMRC’s examples for 2026/27 show how gains are taxed once your taxable income and the unused basic rate band are taken into account.

Let’s also look at a real-life example

Our client (let’s name him “Joe”) has earned income of £32,270 in tax year 2024/25. The basic rate threshold for this year is £50,270 (including the personal allowance of £12,570).

Joe has realised some shares in his employer company (that he acquired under an approved profit sharing scheme) for £64,000.

He plans to use the proceeds to help buy a caravan for £55,000, so has about £9,000 free for other use.

He paid £36,000 for the shares, so his taxable capital gain is therefore £28,000.

From this he can deduct his annual exemption of £3,000, leaving £25,000 taxable in 2024/25. As things stand his CGT bill will therefore be:

This CGT bill will be payable on 31 January 2026 and eat into the £9,000 in cash he has available after purchase of the caravan.

To reduce this tax bill Joe could consider making a net contribution of £5,600 to a personal pension plan (£7,000 gross).

For income tax purposes, this will increase his basic rate tax band from £37,700 to £44,700 (and his basic rate threshold from £50,270 to £57,270). Which now means that all of the taxable capital gain is taxed at 10%, meaning he saves tax of £700.

So, out of the £9,000 of cash after purchase of the caravan, Joe will use:

• £5,600 to make a contribution to a personal pension plan; and
• earmark £2,500 for payment of the new reduced CGT bill on 31 January 2026.

He could perhaps put the balance of £900 towards annual service charges on the caravan.

Note that the same result can also be achieved where a gross pension contribution reduces taxable income to below the basic rate tax threshold. For example, an occupational pension contribution deducted from salary before tax, or an AVC to an occupational pension scheme. The tax saving is achieved through the resulting increase in the amount of the basic rate tax band available to the capital gain.

What about buy-to-let investors?

Many people who realise capital gains these days may be buy-to-let investors. For this set of people, the CGT regime is harsher with capital gains being taxed at 18% (if within the basic rate tax band) and 24% if over the basic rate threshold.

You should also bear in mind that a return in respect of the disposal of a residential property (e.g. a buy-to-let property) has to be delivered to HMRC within 60 days following the completion of the disposal, and a payment on account has to be made at the same time – please see HMRC’s guidance.

Penalties will be applied for any late filing and the guidance makes it clear that interest will accrue on the outstanding tax if it’s still unpaid after 60 days. These rules affect landlords, property developers or UK residents who sell a residential property that’s not their primary home.

When this can be especially useful

In a year with a large gain

If you know a disposal is coming, planning before the end of the tax year matters.

This might involve:

• selling part of an investment portfolio
• disposing of shares outside tax wrappers
• selling a second property
• restructuring assets
• realising gains ahead of retirement

A gain creates a tax event. A pension contribution may help shape how that event lands.

Before a business exit

This is one of the strongest use cases.

Business owners often focus on sale value, not what they actually keep. But the years before an exit are often where the biggest planning gains happen. If a pension contribution can improve tax efficiency now while strengthening long-term retirement funding, it’s worth considering before the transaction completes.

When you’re shifting from accumulation to planning

At a certain point, the question stops being “how do I grow this?” and becomes “how do I use this intelligently?”

That’s where pensions start to matter differently. Not only as a savings vehicle, but as part of a joined-up approach to tax, cashflow and future income.

What are the rules and limits?

This is where good planning matters, because the idea only works if the allowances and timing stack up.

Annual allowance

The standard annual allowance for pension savings is £60,000 in 2026/27. That includes contributions made by you, your employer, or anyone else into your pensions.

Tapered annual allowance

If you’re a higher earner, your annual allowance may be reduced. Depending on your income, the tapered annual allowance can bring this down significantly, in some cases as low as £10,000.

Carry forward

You may be able to use unused annual allowance from the previous three tax years, provided you were a member of a registered pension scheme in those years. You can read more about carry forward here.

Money purchase annual allowance

If you’ve already flexibly accessed a defined contribution pension, the money purchase annual allowance may apply instead.

Relevant earnings still matter

For personal contributions, tax relief is generally limited by your relevant UK earnings, unless you fall within the rule that allows up to £3,600 gross.

What this strategy doesn’t do

This isn’t a catch-all answer.

It doesn’t mean everyone with a capital gain should automatically pay more into a pension. In some cases, locking more money away may create the wrong kind of constraint. In others, tapering, cashflow needs, or future access considerations may mean a different route is more appropriate.

Tax should support the plan. It shouldn’t become the plan.

Why this matters beyond the tax year

The most useful tax decisions do more than reduce a bill.

A well-timed pension contribution may help you:

• lower the immediate tax drag on a gain
• build retirement assets more efficiently
• support future income planning
• balance pensions, ISAs and accessible capital more intentionally
• make better decisions around a business exit or retirement transition

That wider view is the real value.

Because the right question is rarely “how do I save tax?” It’s usually “how do I use this moment to strengthen the bigger picture?”

Where Finura adds value

The technical rules matter. But on their own, they don’t make the decision.

What matters is how those rules apply to your life:

• how much headroom you actually have
• whether carry forward is available
• what the contribution does to your cashflow
• whether a pension is the right home for that money
• how this fits with retirement, gifting, business exit or future income plans

That’s where strategic advice earns its keep.

Our role is to help you make clear, joined-up decisions with fewer moving parts, less noise and more confidence in what happens next.

The bottom line

Pension contributions don’t directly cancel out capital gains tax. But in the right circumstances, they can reduce taxable income, preserve more of the lower CGT band, and make a gain more manageable from a tax point of view. With the right planning, they can also strengthen the long-term structure of your wealth at the same time.

HMRC’s current rules confirm that gains are taxed by reference to the unused basic rate band after income is taken into account, while pension contribution relief and annual allowance rules shape how much scope you have to act. See HMRC’s guidance on Capital Gains Tax rates, rates and allowances, and MoneyHelper’s pages on pension tax relief and the annual allowance.

That’s why this works best as part of a wider strategy, not as a standalone tactic.

FAQs

Can pension contributions reduce capital gains tax?

Not directly. They don’t reduce the gain itself. But they can reduce taxable income and preserve more of your basic rate band, which may mean more of the gain is taxed at the lower rate rather than the higher one.

What is the capital gains tax rate in 2026/27?

For most individuals, the main capital gains tax rates are 18% and 24%, depending on how much of the basic rate band remains after taxable income is taken into account.

What is the capital gains tax annual exempt amount?

The annual exempt amount for capital gains tax is £3,000 in the 2026/27 tax year.

What is the pension annual allowance in 2026/27?

The standard annual allowance is £60,000 in 2026/27, though this can be reduced by tapering or the money purchase annual allowance depending on your circumstances.

Can I carry forward unused pension allowance?

Yes, you may be able to carry forward unused annual allowance from the previous three tax years, provided you were a member of a registered pension scheme in those years and meet the relevant conditions.

Does the money purchase annual allowance affect this strategy?

It can. If you’ve already flexibly accessed a defined contribution pension, the MPAA may reduce how much you can contribute with tax relief.

Sources

• HMRC: Capital Gains Tax — rates
• HMRC: Capital Gains Tax rates and allowances
• HMRC: Capital Gains Tax allowance
• HMRC: HS345 Pension savings — tax charges (2026)
• MoneyHelper: The annual allowance for tax relief on pension savings
• MoneyHelper: The tapered annual allowance for pension savings
• MoneyHelper: Carry forward pension allowance
• MoneyHelper: The money purchase annual allowance (MPAA)
• MoneyHelper: Pension tax relief

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