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Like other pensions, one of the main advantages of a SIPP is the tax benefits you receive. Any personal contributions you make, up to the amount you earn, are given basic rate tax relief at 20% - meaning you pay £800 into your SIPP and the taxman will put in another £200 to make it up to £1,000. Those with no UK earnings at all can make contributions up to £3,600 a year including tax relief, so you would put in £2,880 and HM Revenue & Customs (HMRC) would add a further £720 directly into the SIPP. This includes making contributions into a Junior SIPP for a child.
But if you are a higher rate taxpayer, you can claim extra tax relief through your self-assessment. This is sent to you directly from HMRC.
The benefits soon add up. A higher rate taxpayer putting £8,000 into their pension would get £2,000 added to the pot, and receive up to £2,000 as a rebate directly from HMRC, so the total cost to the higher rate taxpayer is £6,000 for a SIPP worth £10,000.
While you have the benefit of this generous tax relief, you must realise that you cannot access the money in your pension until you are at least 55. If you want to access your savings before this, then you should consider using an ISA for your tax-efficient savings instead.
The table below shows the tax benefits of being in a SIPP:
|Amount you pay (80%)||Government adds (20%)||Total invested in your SIPP||Higher rate tax payers can claim back a further||Effective cost for higher rate tax payers as little as|
*maximum contribution for non-earners
You cannot claim more in tax relief in a year than you have paid through your income tax, so this means you can contribute the equivalent of 100% of your earnings up to a maximum of £40,000 - the annual allowance for 2016/17. Employer contributions are included in the £40,000 limit and you are able to ‘carry forward’ unused allowances from up to three previous tax years.
This annual allowance is tapered for high income individuals. For every £2 of “adjusted income” above £150,000, the annual allowance is reduced by £1. The maximum reduction is £30,000, meaning that someone with adjusted income of over £210,000 has an annual allowance of £10,000. For more information please read our taper relief guide.
If you have flexibly accessed your pension benefits the annual amount you can pay into money purchase schemes, including your SIPP, is reduced from £40,000 to £10,000. You also lose the option of 'carrying forward' unused allowances in your SIPP. For more information read our contributions page.
The maximum that you can save in pension savings is £1m – this is called the ‘lifetime allowance’ and is calculated across all pensions except the state pension. The money invested in your SIPP grows free of capital gains tax and income tax. For more information please read our lifetime allowance page.
This information is based on the legislation as it stands now, but as with anything pension, investment or tax related the rules can change in the future. Remember too that you will see your investment values fall as well as rise. You need to be prepared for this because your money is locked into your SIPP until you are at least 55, so you will not be able to access it.