So you’re curious about SIPP tax relief benefits? You’re in the right place! In this quick guide, we cover everything you need to know about the tax advantages of a Self-Invested Personal Pension (SIPP). Including how to manually claim more than 20% relief.
- How much can I pay in while getting SIPP tax relief?
- How do I claim higher rate tax relief on SIPP?
- What are the other tax advantages of a SIPP?
- What if I’m not earning an income?
- What if I’ve already taken SIPP drawdown?
- How long does it take to get tax relief on a SIPP?
- Can I take 25% tax-free from a SIPP?
- Do I have to pay income tax on SIPP drawdown?
- Do I have to declare SIPP dividends on my tax return?
- Is a SIPP more tax efficient than an ISA?
- How much can you take out of a SIPP tax free?
- What happens if I pay more than £60,000 into a SIPP?
- Can I take 25% tax free every year from my SIPP?
- SIPP investment options
- Combining different types of pensions
How much can I pay in while getting SIPP tax relief?
First things first, let’s talk about the basics.
You can pay up to 100% of your earned income or £60,000 (whichever is lower) into a SIPP each tax year and receive tax relief. This limit is known as your annual allowance.
It’s worth noting that if you have unused annual allowance from the previous three tax years, you can carry it forward.
The carry forward rule can be particularly useful if you have a fluctuating income or have received a large bonus. Or, if you’ve just been neglecting your SIPP savings recently and want to play catch up. You can check your carry forward allowance here.
How do I claim higher rate tax relief on SIPP?
Your SIPP provider will automatically claim 20% of your SIPP contributions for you from HMRC, and they’ll be applied to your SIPP account directly – you don’t need to do anything.
But if you’re a higher-rate taxpayer (paying 40% tax) or an additional-rate taxpayer (paying 45% tax), you need to claim the additional tax relief on your SIPP contributions manually. HMRC doesn’t want to make it too easy for you after all!
- The basic rate tax relief (20%) is added automatically by your SIPP provider. They’ll claim this on your behalf from HMRC, and it usually takes 6-11 weeks for the tax relief to be added to your pension pot.
- You’ll need to claim the remaining tax relief (20% for higher rate or 25% for additional rate) through your Self-Assessment tax return or by contacting HMRC. You can either ask HMRC to adjust your tax code, or they’ll refund the additional tax relief directly to you as a rebate.
Don’t forget to claim your higher rate tax relief, as it can make a significant difference to your overall pension savings!
Here’s a table that makes SIPP tax relief easier to understand:
|Income Tax Band
|Taxable Income (£)
|Tax Relief (%)
|Maximum SIPP Contribution (£)
|1 – 12,570
|100% of income
|Basic Rate Taxpayer
|12,571 – 50,270
|100% of income
|Higher Rate Taxpayer
|50,271 – 125,140
|100% of income (up to £60,000)
|100% of income (up to £60,000)
This guide gives you all the information to make your own decisions about your SIPP. However, if you find the information overwhelming or just want peace of mind you’re getting the most out of your SIPP, we recommend speaking to a SIPP adviser like ourselves. Book a free, initial consultation with an adviser to see how we could help.
What are the other tax advantages of a SIPP?
There are several tax advantages that come with a SIPP:
Tax relief on contributions
As we’ve covered, you get basic rate tax relief (currently 20%) on your contributions, even if you’re not a taxpayer. This means that if you pay £8,000 into your SIPP, the government will automatically top it up to £10,000 (assuming you’re earning at least £8,000 in that tax year).
Tax-free growth and income
This means that any dividends, interest, or capital gains generated by your investments won’t be taxed, allowing your pension pot to grow faster.
For example, if you buy shares in a company outside of a SIPP or ISA (so in a general investment account) and they pay interest or dividends, you’d need to add the amount to your tax return and potentially pay income tax on it.
Similarly, if your shares increased significantly in value over time, you could need to pay Capital Gains Tax when you come to sell them.
With a SIPP, you never have to worry about this.
25% tax-free lump sum
When you reach 55 (or the minimum pension age, if higher by the time you reach it), you can take 25% of your SIPP value as a tax-free lump sum.
This can be a great way to fund early retirement or cover other financial needs.
Flexible income options
You can take the remaining 75% as a taxable income via drawdown, annuity, or a combination of both.
This flexibility allows you to tailor your retirement income to suit your lifestyle and financial goals.
Spreading your income over multiple years could help you pay less tax on your SIPP.
What if I’m not earning an income?
Even if you’re not earning an income, you can still contribute up to £2,880 per tax year to a SIPP and get tax relief.
The government will top it up to £3,600, which includes the 20% basic rate tax relief. So that’s a free £720 to your retirement savings.
This is particularly helpful for non-working spouses, stay-at-home parents, or if you’re taking a career break, as it allows you to keep building their pension pot tax-efficiently even without an income.
What if I’ve already taken SIPP drawdown?
If you’ve started taking income from your SIPP (known as drawdown), you’re still eligible for tax relief on future contributions.
However, your annual allowance drops to £10,000 (also called the Money Purchase Annual Allowance or MPAA).
This reduced allowance applies to prevent individuals from recycling their pension income back into their pension and gaining further tax relief.
It’s important to keep in mind that the MPAA is triggered once you start accessing your pension via drawdown, purchase a flexible annuity, or take an uncrystallized funds pension lump sum (UFPLS).
How long does it take to get tax relief on a SIPP?
Typically, it takes around 6-11 weeks for your SIPP provider to claim tax relief from HMRC. Once they’ve received it, they’ll add it to your pension pot. This process is automatic for basic rate taxpayers, so you don’t have to worry about claiming it yourself.
Again, if you’re a higher rate tax payer, you’ll need to claim the additional amount manually.
Can I take 25% tax-free from a SIPP?
Yes! You can take 25% of your SIPP value as a tax-free lump sum once you reach 55 (or the minimum pension age, if higher). This is known as the pension commencement lump sum (PCLS).
You can use this money however you like – whether it’s to pay off your mortgage, invest in a buy-to-let property, or take a dream vacation.
Remember that you don’t have to take the full 25% in one go.
You can choose to take smaller, tax-free lump sums over time, as long as the total amount doesn’t exceed 25% of your pension value.
Do I have to pay income tax on SIPP drawdown?
Yes, any income you take from your SIPP (beyond the 25% tax-free lump sum) is subject to income tax at your usual rate.
This includes income taken via drawdown or received through an annuity.
The income you receive will be added to your other taxable income for the year (including the state pension if you’re receiving that), which could potentially push you into a higher tax bracket.
It’s essential to plan your withdrawals carefully to minimise your tax liability.
Do I have to declare SIPP dividends on my tax return?
Nope! You don’t need to declare SIPP dividends on your tax return, as they’re already within a tax-advantaged wrapper. It’s the same for your ISA.
This means that any dividends you receive from your SIPP investments can also be automatically reinvested without incurring additional tax liabilities.
Is a SIPP more tax efficient than an ISA?
Both SIPPs and ISAs offer tax advantages, but they cater to different needs:
A SIPP is primarily for retirement savings, with tax relief on contributions and tax-free growth and income.
However, you can only access your money at 55 (or the minimum pension age, if higher) and you do pay income tax on withdrawals (beyond the 25% tax-free lump sum).
ISA are a more flexible option for short-term and long-term savings goals. No tax relief on contributions, but tax-free growth and income like your SIPP, and completely tax-free withdrawals.
In summary, SIPPs are more tax-efficient for long-term retirement savings, while ISAs offer more flexibility for a variety of financial goals. A well-rounded financial plan may include both a SIPP and an ISA to maximise tax efficiency and cater to your unique needs.
How much can you take out of a SIPP tax free?
When you reach the minimum pension age (currently 55), you can take 25% of your SIPP value as a tax-free lump sum.
The remaining 75% is subject to income tax when withdrawn.
Keep in mind that you can choose to take smaller tax-free lump sums over time, as long as the total amount doesn’t exceed 25% of your pension value.
What happens if I pay more than £60,000 into a SIPP?
If you pay more than £60,000 into a SIPP, you’ll exceed the annual allowance. The excess contributions won’t receive tax relief, and you might be liable for an annual allowance charge, which is added to your taxable income for the year.
Keep in mind that if you have unused annual allowance from the previous three tax years, you might be able to carry it forward and avoid the charge. It’s essential to monitor your contributions and take advantage of any unused allowances to maximise your tax relief.
If you’re unsure, speaking to a financial advisor can help.
Can I take 25% tax free every year from my SIPP?
No, you can’t take 25% tax-free every year from your SIPP.
The 25% tax-free lump sum is a one-time option when you first access your pension. After that, any income you take from your SIPP is subject to income tax at your usual rate.
SIPP investment options
One of the key benefits of a SIPP is the wide range of investment options available. Unlike traditional personal pensions, SIPPs allow you to invest in various asset classes, such as stocks, bonds, exchange-traded funds (ETFs), investment trusts, and even commercial property.
Combining different types of pensions
In addition to SIPPs, you might have workplace pensions, personal pensions, or defined benefit schemes.
Combining these pensions into a single SIPP can simplify your retirement planning and make it easier to manage your investments. You can transfer your pensions yourself, or get a financial advisor to help you.
How do I choose the right SIPP provider?
When choosing a SIPP provider, consider factors like fees, investment options, customer service, and online platform features.
Compare different providers and read reviews to find the best fit for your needs.
Keep in mind that lower-cost providers might offer fewer investment options, while more expensive providers could offer additional support and advice.
What happens to my SIPP when I die?
When you pass away, your SIPP can be passed on to your chosen beneficiaries.
They can take it as a tax-free lump sum if you die before 75 or as a taxable income if you die after 75.
It’s essential to keep your beneficiary information up to date to ensure your pension is distributed according to your wishes.
Why is SIPP advice important?
Although this guide provides a comprehensive overview of SIPP tax-relief, it’s essential to seek professional advice tailored to your personal financial situation if you’re unsure about anything.
A qualified financial adviser can help you navigate the complexities of retirement planning, pension consolidation, and tax-efficient investing.
By understanding the ins and outs of SIPP tax-relief, you can make informed decisions and maximise the benefits of this valuable retirement savings tool.