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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Our expert helps with a query from someone contributing to a SIPP and workplace pension
Thursday 30 Sep 2021 Author: Tom Selby

I have been contributing to two pensions in the last few years – my SIPP and my workplace pension. My workplace contributions are made through salary sacrifice and I contribute 40% of my earnings together with an 11% employer contribution. This means the earnings on my P60 for the last two years are well below the 40% tax bracket.

At the same time, I have been making contributions of £5,000 a year to my SIPP and informing HMRC of this so they can adjust my tax code to credit me with the additional 20% tax relief.

HMRC are now saying that I’m only a 20% taxpayer because my P60 shows earnings are below the 40% threshold and therefore they intend to claim the tax relief back from next tax year.

Is this correct? If so, would I be better off completely removing myself from salary sacrifice?

Tom Selby, AJ Bell Head of Retirement Policy says:

Most people are entitled to tax relief on pension contributions up to 100% of UK earnings. The pensions annual allowance (set at £40,000 for the 2021/22 tax year) covers all pension savings made by you or on your behalf (for example by your employer). This is separate from tax relief you receive on your own contributions.

Pension tax relief is paid at your marginal rate of income tax. This means if the contribution comes from a slice of income that was taxed at 40%, you are entitled to 40% relief, while if it comes from a slice of income that was taxed at 20%, you are entitled to 20% relief.

Salary sacrifice is one way of making pension contributions that is popular with UK employers. You enter into an agreement to lower your taxable salary, and your employer diverts the money directly into your retirement pot instead.

This allows you to benefit from both income tax and National Insurance relief automatically, with your employer also benefiting from National Insurance relief. In some cases, your employer may share this saving with you.

Pension contributions paid from taxable salary to a SIPP or any other type of personal pension, on the other hand, benefit from income tax relief only. This is something you should consider carefully when deciding how you make your pension contributions.

When claiming tax relief on SIPP contributions, HMRC will assess your entitlement against your UK earnings for that year.

If, for example, someone earns £55,000 and makes a £10,000 SIPP contribution, they will be entitled to claim higher-rate (40%) pension tax relief on the slice of contribution that comes from the higher-rate tax bracket.

In 2021/22 the higher-rate tax threshold is £50,270, meaning only £4,730 of the contribution would qualify for higher-rate relief. The remaining £5,270 would qualify for basic-rate relief, which on SIPP contributions is paid automatically. Scottish taxpayers are subject to different rates and bands of income tax meaning the figures might differ slightly.


Send an email to with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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