As you get older, you might find you have more spare income than in previous years. 

Pay rises as you climb the career ladder, grown-up children who are now financially independent, or a mortgage that you’ve finally paid off can all lead to your monthly incomings going up and your expenditure going down. 

This can be incremental; you may not even realise it until you take a closer look at your finances. It can be all too easy for this surplus income to languish in your current account, not achieving anything but a boost to your bank balance.

However, there are many ways you can put this surplus income to work, helping to grow your long-term wealth, improving tax efficiency, or supporting your family and loved ones. Read on to find out more.

The right approach to managing your surplus income will be guided by your circumstances and goals

If you’re in the habit of letting spare income simply “coast” in your current account, then you’re not alone. 

According to Saga, there are:

  • More than £300 billion sitting in current accounts not earning a penny in interest
  • 8.3 million accounts each worth more than £10,000; this could earn up to £400 a year before tax if it were put into a savings account earning 4% interest. 

In fact, there are many options for managing your surplus income, all of which could bring more benefits than leaving it in your bank account.

Finding the right approach to managing your surplus income will depend on your goals and circumstances. These shape your financial strategy, helping you to enjoy your wealth and retirement, and pass it on in line with your wishes when the time comes. 

1. Increase your pension contributions

Many people think that once they’re retired they can’t keep paying into a pension, but this isn’t the case. In fact, you can still receive tax relief on pension contributions until you turn 75, at your usual marginal rate: 

  • Basic-rate and non-taxpayers (20%)
  • Higher-rate taxpayers (40%)
  • Additional-rate taxpayers (45%)

For 2026/27, you can contribute up to £60,000 into your pension, or up to 100% of your earnings if this is lower. Even if you have no relevant UK earnings, you can still contribute up to £3,600 gross (£2,880 net) each tax year and receive basic-rate tax relief.

However, you do need to take the Money Purchase Annual Allowance (MPAA) into account. If you’re already accessing funds from any defined contribution (DC) pensions, then your Annual Allowance will drop to £10,000. 

Recent changes to pension rules mean that any unused pension pots will be added to your estate for Inheritance Tax (IHT) calculations from April 2027, so it’s a good idea to discuss this approach with us first to make sure it’s right for you. 

Read more: Inheritance Tax changes: What’s on the horizon?

However, for many people, pension contributions will still offer significant tax advantages and can be an appropriate channel for surplus income. 

2. Maximise your ISA allowances

Your ISAs can also be a tax-efficient way of mopping up any surplus income. Interest and dividends generated from your ISAs are usually free from Income Tax or Capital Gains Tax (CGT), and can help to grow your wealth over the long term. 

  • A Cash ISA can be a good way to save money you may need to access quickly.
  • A Stocks and Shares ISA is usually a longer-term investment that you don’t draw from ad-hoc. 

In 2026/27, you have a maximum allowance of £20,000 to contribute across all your ISAs. However, from April 2027, while your allowance will remain the same, if you’re under 65 you will be limited to £12,000 for a Cash ISA, with the remainder to be spread across other ISA products. You can invest as much of your allowance as you wish into a Stocks and Shares ISA.

If you’re over 65, the rules will remain the same. 

3. Gifting from surplus income

This is one of the lesser-known tax-efficient methods for managing surplus income. This approach allows you to make regular gifts, which are then usually removed from your estate for IHT purposes. 

There are certain criteria you’ll need to meet for this to happen. The gifts must: 

  • Be regular, like weekly or monthly
  • Be taken from income, rather than savings
  • Not reduce or impact your usual standard of living. 

If you do choose this method, it can be a good idea to keep careful records to show how much you’ve gifted and over what period of time.

This approach is a type of lifetime gifting, which means that you can see your recipients benefit from your gifts while you’re still alive, unlike a traditional inheritance. 

You could contribute to school or university fees for grandchildren, help with mortgage payments or childcare fees for your children, or make monthly contributions to a savings account, pension, or ISA. 

The rules about gifting from surplus income can be rather complex, so we’ve put together a free downloadable guide to take you through the process. 

Get in touch

The best approaches to surplus income will vary, depending on your circumstances and goals. We’ll be happy to talk to you about which could work best for you. Please email hello@intelligentpensions.com or call 0800 077 8807. 

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.