SIPP Rules | Contributions, Withdrawals, and Tax Relief

SIPPs are designed to help you save for retirement, and there are specific rules for:

• Contributions 
• Tax relief
• Lifetime allowance
• Withdrawals
• Taxes (income tax and capital gains tax)
• Inheritance
• Divorce

We cover the important SIPP rules you need to be aware of for each of these aspects, so you can make your own decisions about your SIPP.

However, if you find the information overwhelming or just want peace of mind you’re managing your SIPP in the most tax-efficient way possible, we recommend speaking to a specialist SIPP adviser like ourselves. Book a free, initial consultation with an adviser to see how we could help.

Contribution Rules

When it comes to contributing to your SIPP, there are a few key points to remember:

Annual Allowance

1. You can contribute as much as you want each year, but there’s a limit on the amount that will receive tax relief for.
2. For the 2024/25 tax year, you can receive tax relief on contributions up to £60,000 or 100% of your relevant UK earnings, whichever is lower.
3. If you’re a non-earner or earn less than £3,600, you can still contribute up to £3,600 a year (gross) and receive tax relief. So if you put £2,880 in of your own money, you’ll get £720 added on top, automatically, by HMRC. 

Carry Forward

You can carry forward unused allowances from the previous three tax years if you’ve been a member of a pension scheme during those years. 

This means if you haven’t maxed out your annual allowance in previous years, you may be able to contribute more than £60,000 and still receive tax relief.

Tapered Annual Allowance

High earners should be aware of the tapered annual allowance, which reduces the annual allowance for those with an adjusted income of over £260,000. 

For every £2 of adjusted income above this threshold, your annual allowance is reduced by £1, with a minimum reduced allowance of £10,000 for those earning £360,000 or more.

For more help and to calculate your tapered allowance if it applies to you, here is HMRC’s tapered allowance guide. 

Tax Relief Rules

Tax relief is an essential aspect of SIPPs. It makes your retirement savings go a lot further.

Here’s what you need to know:

How Tax Relief Works

1. You receive basic rate tax relief of 20% for all SIPP contributions up to your annual allowance (the lower of your annual income or £60,000)
2. If you’re a higher rate taxpayer you can claim an extra 20% on your tax return, and additional rate taxpayers an extra 25%. This only applies to the amount of earnings you’ve paid tax on at the higher brackets. E.g., if you’ve paid 40% on only £5k of earnings, you’ll only be eligible for the full 40% relief on £5k of contributions. 
3. Your SIPP provider usually claims the basic rate relief for you automatically and it’s added to your pension pot. You’ll need to claim any higher or additional rate tax relief yourself via your tax return. 

Maximising Tax Relief

To make the most of the tax relief available, consider the following tips:

1. Contribute as much as you can within your annual allowance that you can reasonably afford.
2. Utilise carry forward rules if you have unused allowances from previous years.
3. If you’re a higher or additional rate taxpayer, don’t forget to claim further tax relief through your tax return.

Lifetime Allowance Rules

The lifetime allowance rule has now been scrapped! You don’t need to worry about your SIPP pot building up to the lifetime allowance limit any more, and there’s no tax charge if you surpass it. 

Here’s the old rule for those curios: 

The lifetime allowance was a cap on the total amount of pension savings you could build up without incurring additional tax charges. Before the 2023/24 tax year, the lifetime allowance was £1,073,100. If your pension savings exceeded this amount, you would have been subject to a tax charge when you accessed your pension.

Withdrawal Rules

Withdrawing from your SIPP is subject to certain rules:

Age Requirement

You can usually start withdrawing from your SIPP once you reach 55 years of age. This is known as the minimum pension age. However, it’s going up to 57 in 2028, and there’s talk of it going up further to 58.

Depending on your age, it could end up being higher too – the government typically increases it in line with the average living age. 

Tax-Free Cash

Up to 25% of your pension pot can be taken tax-free as a lump sum. This is commonly referred to as the pension commencement lump sum (PCLS). It doesn’t roll over each year. 

Taxable Income

The remaining 75% of your SIPP is subject to income tax at your marginal rate when withdrawn. This can be done through various options, such as purchasing an annuity or using income drawdown.

Tax Rules

It’s important to be aware of the various taxes associated with your SIPP:

Income Tax on Withdrawals

As mentioned earlier, withdrawals are subject to income tax at your marginal rate after your PCLS of 25%. Spreading your SIPP withdrawals over multiple tax years is the best way to reduce income tax, because you’re tax allowances refresh each year.

Capital Gains Tax (CGT)

You don’t have to pay CGT on investments held within your SIPP.

This means you can buy and sell investments within your pension without worrying about CGT implications.

Dividend Income Tax

Dividends and interest from investments in your SIPP are also tax-free. 

This allows your investments to grow more efficiently, as you won’t lose a portion of your returns to dividend taxes.

There’s also no need to declare them on your tax return. 

Inheritance Tax SIPP Rules

In most cases, your SIPP won’t be subject to inheritance tax if you pass away. However, there are some points to consider:

1. If you die before the age of 75, any withdrawals made by your beneficiaries will usually be tax-free.
2. If you die after the age of 75, any withdrawals made by your beneficiaries will be taxed at their marginal rate of income tax.
3. To ensure your SIPP is not subject to inheritance tax, make sure your pension provider has up-to-date information on your nominated beneficiaries.

Divorce SIPP Rules

In the event of a divorce, your SIPP may be subject to one of the following:

1. Pension sharing order: This results in a portion of your pension being transferred to your former spouse as part of the divorce settlement.
2. Earmarking order: This requires you to pay a portion of your pension income to your former spouse once you start receiving it.

Remember, always consult a financial adviser if you’re unsure about any aspect of managing your SIPP or need personalised advice.

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