Tax relief

The government offers tax relief to encourage people to save into their pensions.

Here’s how it works. The method of tax relief depends on the type of pension, but for SIPPs, you’ll receive the first 20% of tax relief (i.e., basic rate) as a top up to the contributions you pay in personally. If you pay income tax on your earnings at a higher rate, you can receive extra tax relief on the money you pay into your SIPP by completing a self-assessment tax return.

Keep in mind that you'll only receive tax relief up to the amount you earn that tax year. For example, if you want to pay in £60,000 (including tax relief) to your pension, you'll need to earn at least £60,000 this tax year.

This limit doesn’t apply if your employer is making the contribution on your behalf, but employers can still receive tax relief on money they pay into pensions for their employees.

Although they both apply to pensions, the concept of tax relief isn’t the same as the annual allowance.