One of the major benefits of putting money into a SIPP (Self-Invested Personal Pension) is that contributions come with tax relief. This is essentially a reward from the government for saving for retirement. Interested in learning more about SIPP tax relief? Here’s everything you need to know.
SIPP Tax Relief: How It Works
SIPP tax relief is a tax break for those who make contributions to a SIPP account. The way it works is that 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 are a higher-rate or additional-rate taxpayer, you will receive 20% tax relief automatically after making a contribution. You will then need to make a claim through your tax return to receive the full amount of tax relief you are entitled to.
If you don’t make this claim, you will 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 their £1,000 contribution will only cost them £600.
SIPP Tax Relief Annual Allowances/Limits
When it comes to receiving tax relief, there is a limit to how much you can contribute to a SIPP every year. This is known as the pension Annual Allowance and it is 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 the Annual Allowance, however. One way to potentially contribute more than the Annual Allowance 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 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 have 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 have 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.T
Currently, you can take 25% out of your SIPP tax-free when you turn 55 (57 from 2028).
Tax relief usually gets added to a SIPP within a few months of making a contribution.
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.
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.
Based in London, Edward is a distinguished investment writer with an extensive client portfolio comprising a diverse array of prominent financial services firms across the globe. With over 15 years of hands-on experience in private wealth management and institutional asset management, both in the UK and Australia, he possesses a profound understanding of the finance industry.
Before establishing himself as a writer, Edward earned a Commerce degree from the prestigious University of Melbourne. Complementing his academic background, he holds the esteemed Investment Management Certificate (IMC) and is a proud holder of the Chartered Financial Analyst (CFA) qualification.
Widely recognized as a sought-after investment expert, Edward’s insightful perspectives and analyses have been featured on sites such as BlackRock, Credit Suisse, WisdomTree, Motley Fool, eToro, and CMC Markets, among others.
