Investing in a Self-Invested Personal Pension (SIPP) to boost your retirement savings?
SIPPs offer tax advantages, flexibility, and investment control, making them a popular choice for retirement planning.
In this guide, we explore how SIPP contributions work, annual allowances, getting maximum tax relief (it’s not all automatic), and tips for maximising your pension savings.
We’ll also answer frequently asked questions and discuss SIPP contributions from your limited company.
- How do SIPP contributions work?
- How much can I pay into a SIPP each year?
- How much can I pay into a SIPP and get tax relief?
- How much should I contribute to my SIPP?
- Do my SIPP contributions go on my tax return?
- Can I backdate SIPP contributions?
- SIPP contributions for non-earners
- SIPP contributions after retirement
- When Is Tax Relief Added To My SIPP?
- SIPP employer contributions
- SIPP Contributions from Your Limited Company
- Is it worth putting money in a SIPP?
How do SIPP contributions work?
Here’s how SIPP contributions work:
- Making contributions: You can contribute to your SIPP through regular payments, one-off lump sums, or a combination of both.
- Tax relief: The government adds tax relief to your contributions, increasing the amount you invest. Tax relief is provided at your marginal tax rate, which means you receive more tax relief as your income increases.
- Investment choices: Your SIPP provider offers a wide range of investment options, allowing you to build a diversified portfolio based on your risk appetite and financial goals. You can actively manage your investments or choose a hands-off approach with a pre-built portfolio.
- Growth: Over time, your investments can grow thanks to potential capital gains. The longer you invest, the more significant the growth potential.
- Accessing your pension: You can access your pension fund when you reach the minimum pension age (currently 55), either as a lump sum or regular income. Up to 25% of your pension can be withdrawn tax-free, while the remaining 75% is subject to income tax.
You can also transfer funds from other pension schemes to your SIPP.
How much can I pay into a SIPP each year?
The amount you can pay into a SIPP each year depends on your annual allowance.
You can contribute:
- Up to 100% of your annual earnings or;
- A maximum of £60,000 per tax year (whichever is lower).
Keep in mind that this limit applies across all your pension schemes, not just your SIPP.
If you’re a high earner with an income above £200,000, your annual allowance might be reduced due to the tapered annual allowance rules.
Also, you may be entitled to a carry-forward allowance, which is where you can make up for previous year’s allowances you haven’t used.
To get peace of mind that you’re making the absolute most out of your tax benefits, we recommend speaking to a specialist SIPP adviser, like ourselves. Book a free, initial consultation to find out how we can help.
How much can I pay into a SIPP and get tax relief?
You’ll receive tax relief on your SIPP contributions up to your annual allowance. For example, if you earn £50,000 per year, you can contribute up to £50,000 to your SIPP and receive tax relief on the full amount.
The government provides tax relief on SIPP contributions at your marginal tax rate, as follows:
- Basic rate taxpayers receive 20% tax relief.
- Higher rate taxpayers receive 40% tax relief.
- Additional rate taxpayers receive 45% tax relief.
It’s essential to understand that tax relief is automatically added to your SIPP at the basic rate. But if you’re a higher or additional rate taxpayer, you must claim the extra tax relief through your tax return.
How much should I contribute to my SIPP?
The amount you should contribute to your SIPP depends on various factors, such as your age, income, financial goals, and retirement plans. To make the most of your SIPP, consider the following strategies:
- Start early: The earlier you start contributing to your SIPP, the more time your investments have to grow. This allows you to take advantage of the power of compound interest, which can significantly increase your pension pot over the long term.
- Maximise tax relief: Try to contribute as much as you can afford within your annual allowance to take full advantage of the tax relief available. This effectively boosts your pension savings without any additional cost to you.
- Regularly review your contributions: Your financial situation and goals may change over time. It’s essential to review your SIPP contributions regularly and adjust them accordingly. For example, if you receive a pay raise, consider increasing your contributions to maximise tax relief and pension growth.
- Consider employer contributions: If your employer offers to contribute to your SIPP, take advantage of this opportunity. Employer contributions can be a valuable way to boost your pension savings without affecting your personal annual allowance.
- Diversify your investments: A well-diversified investment portfolio can help spread risk and potentially increase returns. Try to build a diversified portfolio that aligns with your risk tolerance and financial goals.
Do my SIPP contributions go on my tax return?
You should report your SIPP contributions on your tax return if you’re a higher or additional rate taxpayer.
By doing so, you can claim any additional tax relief you’re entitled to above the basic rate. Remember to include both your personal contributions and any employer contributions on your tax return.
If you’re a basic rate taxpayer, you shouldn’t need to put your SIPP contributions on your tax return – your SIPP provider should notify HMRC for you and the relief will be automatically added.
Can I backdate SIPP contributions?
You can carry forward any unused annual allowance from the last three tax years, which allows you to make a larger contribution in the current tax year.
To use the carry forward rule, you must have been a member of a pension scheme during those years, even if you didn’t make any contributions.
This is a great way to make sure you’re getting the most out of your pension allowances if you can afford it.
Remember, before April 2023, the maximum annual allowance was only £40,000.
SIPP contributions for non-earners
Non-earners, such as stay-at-home parents or unemployed individuals, can still contribute to a SIPP.
You can contribute up to £3,600 per tax year if you’re not working, including the 20% tax relief from the government.
This means that you contribute £2,880, and the government adds £720, bringing your total contribution to £3,600.
SIPP contributions after retirement
You can continue making SIPP contributions after retirement, but there are some restrictions:
- If you’ve accessed your pension via flexi-access drawdown or taken a lump sum, your annual allowance reduces to the Money Purchase Annual Allowance (MPAA) of £10,000.
- If you’re over the age of 75, you can still contribute, but you won’t receive tax relief on your contributions.
When Is Tax Relief Added To My SIPP?
HMRC will generally pay tax relief to your SIPP within 6-10 weeks following your contribution. However, this can vary based on your specific provider and your personal tax situation.
Also, this is just for your basic rate tax relief.
For any higher or additional rate tax your claiming relief on manually (as mentioned above), you’ll need to claim this via your tax return, and it typically takes several months for your relief to be paid.
SIPP employer contributions
Employers can make contributions to your SIPP, which can be an excellent way to boost your pension savings.
These contributions are typically made on top of your salary and count toward your personal annual allowance.
Here are some key points about SIPP employer contributions:
- They’re not subject to income tax or National Insurance.
- They may count towards your employer’s annual business expenses, reducing their corporation tax liability.
- Your allowance for employer contributions is the same as your personal annual allowance (£60,000 or 100% of your earnings, whichever is lower).
SIPP Contributions from Your Limited Company
If you own a limited company, you can make SIPP contributions directly from your company.
This can be an effective way to save for your retirement while also benefiting your business.
Here’s a breakdown of how SIPP contributions from your limited company work:
Advantages of Company SIPP Contributions
- Corporation tax relief: Contributions made by your limited company to your SIPP are considered an allowable business expense. This means that these contributions can be deducted from your company’s profits, reducing its corporation tax liability.
- No personal tax implications: When your limited company contributes to your SIPP, these contributions don’t count towards your personal annual allowance. They also don’t have any impact on your personal income tax or National Insurance contributions.
- No impact on your dividend allowance: Since the contributions come directly from your company, they don’t affect your dividend allowance, allowing you to still receive dividends tax-efficiently.
How to Make SIPP Contributions from Your Limited Company
To make SIPP contributions from your limited company, follow these steps:
- Choose a SIPP provider: Research SIPP providers and select one that offers a wide range of investment options and low fees. Ensure the provider accepts employer (limited company) contributions.
- Set up a SIPP: Open a SIPP account in your name and provide your limited company’s details as the employer.
- Make the contributions: Transfer the desired amount from your limited company’s bank account to your SIPP account. The contributions must be made directly from the company’s account, not your personal account.
- Claim corporation tax relief: Report the contributions on your company’s annual accounts and tax return as a business expense. This will reduce your corporation tax bill.
- Invest the contributions: Invest the contributions in line with your investment strategy.
Keep in mind
While making SIPP contributions from your limited company can be tax-efficient, there are some important considerations to keep in mind:
- Employer annual allowance: Your limited company’s SIPP contributions are subject to an employer annual allowance, which is the same as your personal annual allowance (£60,000 or 100% of your earnings, whichever is lower). Make sure your company’s contributions don’t exceed this limit to avoid tax penalties.
- Wholly and exclusively rule: To be considered an allowable business expense, your company’s SIPP contributions must be made “wholly and exclusively” for the purpose of the trade. This means that the contributions must be justifiable as a legitimate business expense, such as remuneration for your work as a company director.
- Pension age restrictions: Like personal SIPP contributions, you can’t access your pension funds until you reach the minimum pension age (currently 55). Make sure you have sufficient cash reserves and other accessible investments to cover your expenses before retirement.
SIPP contributions from your limited company can be a tax-efficient way to save for your retirement and benefit your business. However, it’s important to consider the potential implications and consult with a financial advisor if necessary before proceeding.
Is it worth putting money in a SIPP?
Investing in a SIPP can be a smart move for your retirement planning, offering several benefits:
- Tax-efficient savings: The tax relief on contributions and the potential for tax-free growth make SIPPs a highly tax-efficient way to save for retirement.
- Investment flexibility: SIPPs offer a wide range of investment options, allowing you to create a diversified portfolio tailored to your risk appetite and financial goals.
- Control over costs: SIPPs can have lower fees and charges compared to traditional pension schemes depending on your investments and provider. This gives you more control and transparency over your pension costs and allows your investments to grow more efficiently.
- Retirement income flexibility: When it’s time to access your pension, SIPPs offer various options, including taking a tax-free lump sum, setting up a flexible income drawdown, or purchasing an annuity. This flexibility allows you to create a retirement income strategy that suits your needs and preferences.
However, it’s essential to consider your personal circumstances and weigh the pros and cons before deciding if a SIPP is right for you. Factors to consider include your investment knowledge, the time you can dedicate to managing your SIPP, and your overall retirement planning strategy.
How do I avoid paying tax on my SIPP?
While you can’t completely avoid paying tax on your SIPP, there are ways to minimise your tax liability:
Tax-free lump sum: You can withdraw 25% of your pension as a tax-free lump sum when you reach 55 (or the minimum pension age).
Plan your withdrawals: Schedule your withdrawals to stay within your personal allowance and avoid higher tax rates. You can spread your pension income across different tax years to minimise your tax bill.
Consider other tax-efficient investments: In addition to your SIPP, you might consider investing in other tax-efficient savings vehicles, such as ISAs, to diversify your retirement income sources and potentially reduce your tax liability.
Do you have to pay into a SIPP every month?
No, you don’t have to make monthly contributions to a SIPP.
You can choose to make regular contributions, one-off lump sums, or a combination of both, depending on your preferences and financial situation.
It’s good to find a contribution strategy that works for you and fits your budget.
Can I pay a lump sum into a SIPP?
Yes, you can make lump sum contributions to a SIPP.
However, you need to ensure you don’t exceed your annual allowance or any available carry-forward allowances to avoid tax penalties.
Make sure to consider your overall pension contribution strategy and whether a lump sum contribution aligns with your financial goals.
What happens if I pay more than my annual allowance into my SIPP?
If you exceed your annual allowance, you may face a tax charge on the excess amount.
The charge is typically equal to your marginal income tax rate.
You should also report any excess contributions on your tax return to ensure you’re paying the correct amount of tax.
How much of a SIPP is tax-free?
When you reach the minimum pension age (currently 55), you can typically withdraw up to 25% of your SIPP as a tax-free lump sum.
The remaining 75% is subject to income tax when you withdraw it as income.
Can I reinvest my tax-free lump sum into a SIPP?
While it’s possible to reinvest your tax-free lump sum into a SIPP, doing so may not be tax-efficient.
Once you’ve accessed your pension and taken a lump sum, your annual allowance reduces to the Money Purchase Annual Allowance (£10,000). Any contributions above this limit will be subject to a tax charge.