Pension growth is largely tax free: HMRC says most investment growth inside a registered UK pension scheme is exempt from income tax and capital gains tax.
Tax touches a pension at three points: money going in, growth while it stays invested, and money coming out. This guide is about the middle one. It compares that treatment with a general investment account and an ISA, then says what is taxed later and where inheritance tax is heading. With a pot split between a workplace scheme and a SIPP, it helps to have someone see both. Arranging that with an FCA-authorised adviser needs a few details, sent from the form on this page; their call costs you nothing.
Is growth inside a pension or SIPP tax free?
Mostly yes. HMRC's Pensions Tax Manual describes the pension system as exempt at the investment stage, saying "most investment growth of the assets held within registered pension schemes is exempt from income and capital gains tax." Interest on cash, dividends and profits from selling a holding all fall under that. The rule attaches to the registered scheme, so a SIPP and a workplace pension are treated alike.
There are limits. The same manual carves out one structure: holdings through a property investment limited liability partnership do not get the exemptions. It also says a scheme holding taxable property, which includes residential property and tangible moveable assets, faces tax consequences of its own. Ordinary funds, shares and cash are not in that group, but an unusual holding is worth raising with the provider before buying.
"Tax free" describes the tax, not the result. Investments can fall as well as rise, and you may get back less than you put in. Charges come out of a pot whatever the tax rules say; see pension charges for those and private pension rates for the growth assumptions firms may use in projections.
How does that compare with a general investment account or an ISA?
A stocks and shares ISA shields growth in a similar way; a general investment account does not. The table sets out the treatment for the 2026/27 tax year, from GOV.UK and HMRC.
| Registered pension | Stocks and shares ISA | General investment account | |
|---|---|---|---|
| Dividends and interest | Exempt from income tax | Not taxed | Dividends beyond a £500 allowance are taxed; savings interest can be taxable |
| Capital gains | Exempt from capital gains tax | Not taxed | Taxed on overall gains beyond a £3,000 allowance |
| Paying in | Tax relief, within limits | Up to £20,000 a tax year, no relief | Any amount, no relief |
| Taking money out | From the minimum pension age; partly tax-free, the rest taxed as income | No tax on the interest, income or gains it has earned | Tax may be due on income as it is paid and on gains when you sell |
The figures behind the last column come from GOV.UK. It sets the dividend allowance at £500 a year, with tax due only on dividends above it, and says the rates for 2026/27 rise with your income tax band. For capital gains, you only pay on overall gains above the Annual Exempt Amount, which it puts at £3,000. It says savings interest from bank and building society accounts may be taxable. On ISAs, GOV.UK says you do not pay tax on interest on cash in an ISA or on income or capital gains from investments in one, and that you can save up to £20,000 in a tax year.
So during the growth years a pension and an ISA are alike, and the differences sit either side. A pension earns tax relief on the way in, as the pension tax relief guide explains, and is taxed on the way out. An ISA takes money already taxed and returns it without further tax. Pension money is also tied up until the normal minimum pension age, which HMRC gives as 55 today and 57 from 6 April 2028, with exceptions for some people who hold a protected pension age (taking your pension at 55). Which route suits a person turns on income, age and goals, and that comparison belongs with an adviser rather than a rule of thumb.
What gets taxed when money leaves the pension?
Growth escapes tax only while it sits inside. GOV.UK says you can usually take 25% of what has built up in any pension as a tax-free lump sum, with a ceiling of £268,275, called the lump sum allowance. People who hold a protected allowance may be able to take more. The tax-free lump sum guide covers how the allowance is used.
Everything beyond that is taxed as income at your usual rates. GOV.UK gives an example, and it is only an example: a pension worth £60,000, from which £15,000 is taken tax-free, leaving £45,000 from which the provider deducts tax. Because the taxed portion is stacked on top of earnings, State Pension and any other income, the rate comes from your whole year, and GOV.UK cautions that a large withdrawal might push you into a higher rate. The drawdown tax guide explains how withdrawals are taxed, and the pension tax overview joins the stages together.
How much the free growth is worth, set against tax on withdrawals, depends on your other income; leave your number via the enquiry form here and ask for a call-back to run through it.
The final tax bill therefore depends on when and how you draw, not only on how well the investments did. That is why people with a large pot or several income sources often want the sequence looked at before they start.
What changes for inheritance tax in April 2027?
As of 2 November 2026 the change is law rather than a proposal. Finance Act 2026, which carries a Royal Assent date of 18 March 2026, brings unused pension funds into inheritance tax, and its section 71 says the changes "apply in relation to deaths, and (so far as relevant) to other transfers of value within the meaning of IHTA 1984, occurring on or after 6 April 2027."
In outline, HMRC describes the change as counting most money left unused in a pension, and most pension death benefits, as part of the estate for inheritance tax. Until then, unused funds in discretionary schemes, where the trustees decide who receives death benefits, can pass on with no inheritance tax charge, and most UK schemes work that way; a few non-discretionary schemes, such as the NHS scheme, already count as part of the estate. From the new date, personal representatives report and pay any tax due. Death in service benefits are left out, the existing exemptions for a surviving spouse or civil partner and for registered charities are kept, and a death before 6 April 2027 is handled under the current rules.
The detail is still being finished. HMRC says guidance and supporting materials will be published for April 2027, so check GOV.UK's inheritance tax pages for the latest before acting on any date. For what counts and who pays, read pensions and inheritance tax; and the death benefits guide covers income tax for the people who inherit.
Questions on tax and pension growth
Is capital gains tax due on a SIPP?
Not on gains made inside it. HMRC's manual says gains from disposing of investments held for a registered scheme are exempt from capital gains tax. Tax can arise later, on money you draw out.
Are dividends in a SIPP taxed?
While they stay inside, no. The manual says income from investments held for the scheme is exempt from income tax, which takes in dividends. You are taxed on what you withdraw, not on dividends as they arrive.
Is interest on cash in a pension taxed?
The manual's exemption names deposits as well as investments, so interest earned on cash held for the scheme is not charged income tax. Whether any tax is taken at source before the interest reaches the scheme is a point your provider can confirm.
Is there a yearly limit on tax-free pension saving?
Yes. The annual allowance is £60,000 in 2026/27 according to GOV.UK, and it can be lower in some cases. The annual allowance guide has the detail.
Does tax-free growth mean my pension cannot fall in value?
No. The exemption means gains are not taxed, not that gains are certain. Values can fall, and you may get back less than you paid in.
Weighing growth, withdrawals and what you leave
Free, impartial guidance on defined contribution pots is available from Pension Wise, run by MoneyHelper. Request a call-back via the quote form if you want growth, withdrawals and estate considered together; an FCA-authorised adviser returns the call and the call costs nothing.