SIPP Tax Relief Explained – Tax Free Profits For Your Retirement

One of the major benefits of putting money into a SIPP is that contributions come with tax relief. This is essentially a reward from the government for saving for retirement. Here’s what you need to know.

SIPP Tax Relief: How It Works

SIPP tax relief is a tax break on contributions to a SIPP account. When you make a SIPP contribution, the government hands you back the tax you’ve already paid on that money.

The amount of tax relief you’re eligible for depends on the income tax band that you’re in. For basic-rate taxpayers, the amount of tax relief available is 20%. Meanwhile, for higher-rate and additional-rate taxpayers, the rates are 40% and 45% respectively.

Tax band	Tax relief available	Cost of a £1,000 SIPP contribution
Basic rate	20%	£800
Higher rate	40%	£600
Additional rate	45%	£550

It’s worth noting that not everyone is eligible to receive tax relief. To be eligible for tax relief, you must be a UK resident under the age of 75.

How to Claim SIPP Tax Relief

If you’re a basic-rate taxpayer, you don’t need to do anything to receive tax relief on a SIPP contribution. After a contribution, your tax relief will automatically be claimed by your pension provider and paid into your account.

If you’re a higher-rate or additional-rate taxpayer, you’ll receive 20% tax relief automatically after making a contribution. You’ll then need to make a claim through your tax return, or by contacting HMRC, to receive the full amount of tax relief you’re entitled to.

If you don’t make this claim, you’ll only receive 20% tax relief.

Tax Relief Examples

Let’s say a basic-rate taxpayer makes a contribution of £800 into their SIPP account. In this scenario, the government will add in another £200 for the investor, taking the total contribution to £1,000. And the investor won’t have to do anything to receive the £200 bonus – it will automatically be paid into their account.

Now, let’s say a higher-rate taxpayer makes a contribution of £800 into their SIPP. In this scenario, the government will also add in £200 for the investor automatically.

However, on top of this, the investor will be able to claim back an additional 20% tax relief (£200) through their tax return. This means that, effectively, a £1,000 contribution has only cost them £600.

SIPP Tax Relief Annual Allowances/Limits

There’s a limit to how much you can contribute to a SIPP every year and get tax relief. This is known as the “pension annual allowance” and it’s currently £60,000 or 100% of your salary, whichever is lower.

So, for example, if your salary was £175,000, and you wanted to make a SIPP contribution of £75,000, you would only be eligible for tax relief on £60,000 of your £75,000 contribution.

What Are Carry Forward Rules?

There are ways to get around this annual allowance, however. One way is to take advantage of “carry forward” rules.

These allow you to carry forward any unused annual allowances from the previous three tax years. To do this, you must make the maximum allowable SIPP contribution in the current tax year.

You can then use unused annual allowances from the three previous tax years.

SIPP Tax Relief for High Earners

High earners face a tapered annual allowance when it comes to SIPP tax relief.

The way this works is that if you have an “adjusted income” of more than £260,000 per year, and a “threshold income” of more than £200,000 per year, your annual allowance is tapered (lowered) by £1 for every £2 you are over the adjusted income figure.

The tapering stops at an adjusted income of £360,000, however, meaning that if your adjusted income is higher than this, you will still have a pension allowance of £10,000.

Tax Relief Once You Take Your Pension

If you’ve already started taking an income from your SIPP, you can still pay into it. However, you may face the money purchase annual allowance (MPAA) instead of the standard pension annual allowance (whether the MPAA applies will depend on how you’ve accessed your pension).

The MPAA is designed to stop people from withdrawing pension savings and then paying them straight back into their account again (and gaining tax relief twice). Currently, the MPAA is £10,000.

How much can be taken out of a SIPP tax-free?
Currently, you can take 25% out of your SIPP tax-free when you turn 55 (57 from 2028).

When does tax relief get added to a SIPP?
Tax relief usually gets added to a SIPP within a few months of making a contribution.

How much of my SIPP is tax-free?
You can invest your entire SIPP tax-free. And when you turn 55 (57 from 2028), you can access 25% of your money tax-free.

How do I avoid paying tax on my SIPP?
One way to avoid paying tax on your SIPP is to only withdraw a small amount every year in retirement so that your total income is under the personal allowance. By keeping your income under the personal allowance, you won’t have any tax to pay.