How can I fund my SIPP?

Tom Selby, AJ Bell’s Senior Analyst, explains how you can pay contributions in to your SIPP, your annual allowance, and how tax relief works.

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So, you’ve successfully set up your SIPP and you’ve settled on your portfolio choices and investment strategy. But how much can you pay into your pension?

Hi, I’m Tom Selby, AJ Bell’s senior analyst, and I’m going to walk you through just how much you can put into your pension each year, and throughout your lifetime.

Let’s kick off with how much you can pay into your Self Invested Personal Pension, or SIPP, each year. 

Tax reliefs on pensions are extremely generous compared to many other financial products. Tax relief is paid at your marginal income tax rate. So if you’re a basic rate taxpayer, for example, for every £80 you put in, the Government will top it up with £20.

And it’s a similar principle if you’re a 40% taxpayer. You contribute £80 to your SIPP, and your SIPP receives a further £20. However, you can also claim a further £20 through your self-assessment tax return. This goes to you rather than into your SIPP.

Tax relief is limited by reference to your UK taxable earnings – this means your total pension contribution can’t be worth more than your salary in any given year. So if you earned £28,000, for example, the most you could pay into your SIPP is £22,400. The tax relief would add a further £5,600 to take you up to a total SIPP contribution of £28,000.

You also need to be aware of the ‘annual allowance’. This is the maximum you can pay before you incur tax charges, and is currently set at £40,000. So in practice, earnings permitting, you would contribute £32,000. The tax relief, once received, would take the value of the contribution up to the £40,000 limit. Care is needed though, because the annual allowance covers all contributions, including those made by your employer, to all schemes.

If you contributed more than £40,000, you may still get tax relief if you have sufficient UK taxable earnings, but you would pay a tax charge.
That is unless you can use the so-called ‘carry forward’ rules. This means that, if in one year you pay in more than forty thousand pounds, you can utilise any unused allowance from the previous three tax years provided you’ve paid in less than £40,000 in those tax years.

The picture gets even more complicated if you’re earning more than one hundred and fifty thousand pounds, but bear with me! For every two pounds of “adjusted income” you receive above £150,000, your annual allowance falls by one pound. Once your adjusted income reaches two hundred and ten thousand pounds, your annual allowance is set at £10,000 for that tax year.

Adjusted income includes any employer pension contributions you receive during the tax year, as well as your others sources of income.

Alongside the forty thousand pounds annual allowance, SIPPs are also subject to a £1 million ‘lifetime allowance’ – effectively a cap on the amount of pension assets you can hold during your lifetime. If you have pension assets worth more than £1 million when you start taking money out of your pension after age 55, you’ll be hit with some pretty hefty charges on the excess.

If you take the money as a lump sum you’ll pay a fifty five per cent tax charge, or you can pay a twenty five per cent charge up front and then extra withdrawals will be taxed in the same way as income.

It might also be worth looking into ‘fixed’ and ‘individual’ protection, tools you can use to minimise tax charges if you’re at risk of breaching the lifetime allowance. However, these come with strings attached, so speak to your adviser and review the rules before protecting your pot.

One final point in all this: these are the pension tax rules as we stand today. The Government has a nasty habit of changing and tweaking the rules in Budgets and Autumn Statements, but we will endeavour to keep you abreast of any changes that might affect you. 

That is just a whistlestop tour of how the pension contribution rules work in the UK. You can find more detailed information via the AJ Bell Youinvest website.

Thank you very much for watching and happy investing.