How much and how little you contribute to self-invested personal pensions (SIPPs) and other rules may seem overwhelming, but the good news is we can help you with these issues, because the advisors we work with are experts when it comes to SIPPs, and they should be able to give you the right advice.
The experienced advisors we work will be happy to help you manage all the nuances that come with SIPP pension contributions.
How much can I put in a SIPP?
Maximum SIPP contribution for under £150,000
For those who make less than £150,000 a year, each year your allowable deposit is up to 100% of your UK income in your SIPP. That is called your annual SIPP allowance. HMRC adds 20% to your contributions if you’re a basic rate taxpayer.
Example: If you deposit £800 in your SIPP, the taxman adds £200, giving you £1,000.
What is the maximum SIPP contribution for people who earn over £150,000?
Here’s what is known as tapered SIPP allowance comes into play, where the average maximum annual SIPP allowance of £40,000 reduces by £1 for every £2 you put into your SIPP. It hits its minimum of £10,000 if you make more than £210,000.
Example: If you make more than £210,000 per annum, your SIPP contribution limit would be limited to £10,000 a year.
What are the contribution rules in the UK?
The following rules apply:
- Income has to come solely and totally from a UK-based source.
- The SIPP owner is under 75.
- The SIPP owner resides in the UK.
- The SIPP owner resided in the UK during the last five tax years, as well as when they set up the SIPP.
- The SIPP owner had to be an active member of the SIPP when he first started depositing funds into that account.
- The SIPP owner can only access this money when he/she’s 55 (57 from 2028). He/she’s allowed 25% tax free.
What is the definition of income?
Income refers to:
- Any work income that includes bonus, overtime, statutory sick pay or statutory maternity pay. Permanent health insurance payments made by the employer, or commission.
- Self-employment earnings, whether from a trade, profession, or a side-gig.
- Redundancy payment above £30,000.
- Income earned from a UK-based furnished property that is rented for holiday accommodation. (You need to fill this out on your self-assessment tax return for SIPP contributions).
- Income from patents (even if there was a collaboration with the invention).
- Income from an overseas UK-based business that pays UK taxes
The following is not considered income:
- Income from your rentals.
- Income from investments.
- Capital gains (i.e. profit from the sale of a UK-based property or investment).
Definitions of SIPP income can be complex. We advise you speak to an expert if you’re uncertain on your situation.
How often can I contribute to my SIPP?
You, your employer, and/or the pension provider decide how often and when you make this SIPP’s regular contributions – weekly, monthly, annually, or at any other particular interval. If you regularly contribute 100% of your annual income, you will be given £10,800 on your 75th birthday.
Note: When you calculate your annual SIPP allowance also take into account your employer’s contribution to your SIPP. These add to your income. You don’t want the total to exceed £40,000.
What is the government contribution for higher tax payers?
Higher tax-payers earn up to 45% higher tax relief, depending on their tax contributions.
Example: If you’re in the 40% tax bracket and you deposit £800 in your SIPP, the government adds £320 giving you a total of £1,120 for your SIPP.
Government contribution for Scotland
Residents from Scotland are granted a 1% higher tax relief, receiving tax returns that range 21-46% depending on how much tax they contribute.
Lifetime SIPP allowance
Over the course of your lifetime, HMRC allows you to put away up to £1.055 million as an individual. That’s called the Lifetime SIPP allowance (LTA) that rises in line with consumer price inflation (CPI).
Exceeding that LTA capped amount is taxable at 25% (plus income tax) on any pensions saving you make in excess of your LTA. Alternately, you may have a 55% lump sum tax charge deducted.
What is the annual allowance charge (AAC)?
This is where you make a deposit in your SIPP that exceeds your annual UK income. In these circumstances you would be fined, which subsequently cancels any tax relief you may have received from that contribution.
If you’re concerned that you may incur this annual allowance charge or some other SIPP tax charge, give us a call today on 0808 189 0463 or make an enquiry here, and we’ll put you in touch with a pensions expert who can offer guidance on this.
Your employer and you
By law, if you’ve chosen (and are allowed) a SIPP as your pension plan, your employer has to contribute to it. Employers contribute a percentage of your income per year, depositing it in your SIPP weekly, monthly or at any other pre-arranged interval.
While your employer’s contributions are gross – meaning tax is deducted from their SIPP contributions – your SIPP contributions are net, making them tax-free. You’ll want to take this into account when calculating your lifetime and annual SIPP allowances.
Example: Let’s say you pay the basic rate of tax and get £800 from your employer. You have £800 in this SIPP account. At the end of the year, if you were to invested £800 from your own personal earnings, the government would hike that to £1,000.
SIPP contribution limit
Generally, the lowest annual amount you’re allowed to deposit in your SIPP is £1,000. If your provider allows, you can spread this deposit over several months.
Note: The lifetime SIPP allowance is per person rather than per pension. So if you have several pensions, you don’t want the total amount in these pensions to exceed your lifetime SIPP allowance limit. The same rule goes for annual SIPP allowance.
How much can I pay into a SIPP if I am not working?
If you’re a UK resident under the age of 75 and are unemployed, your maximum annual SIPP allowance is £2,880. HMRC reimburses £720 to your pot. You’re charged tax for deposits that exceed your earnings.
Example: Some grandparents that are no longer employed like to open a SIPP for their new grandchild. You can save up to £2,880 in this Junior SIPP, while the government tops it up to £3,600 through tax relief.
How about if I work part time or less hours than before?
In this case, too, your limit is £2,880 per year. That’s minus the £720 from the taxman. This £2,880 annual allowance includes the SIPP contributions from your employer.
How about non-taxpayer contributions?
Non-taxpayers can contribute to your SIPP even if they don’t work and don’t pay tax. The maximum they can contribute is £3,600 gross, or £2,880 net, to which the UK government adds £720. The same rule applies to anyone else who is in the same circumstances and wants to contribute to your SIPP.
Example: Some parents like to contribute to their child’s SIPP. They can do so with the HMRC topping-up their SIPP contributions.
SIPP backdated contributions
This option allows you to make a one-time SIPP deposit of more than £40,000, if you paid less than your annual SIPP allowance in any of the last three years.
The following conditions apply:
- You’ve deposited the maximum amount of £40,000 in your SIPP this year.
- You contributed less than £40,000 in one or more of the previous three years.
- During those last three years, you contributed around the same amount as you’re contributing now.
Note: Even with these conditions present, you can’t carry forward if you’ve already started drawdown from your SIPP. For details, please see our article on drawing down a SIPP income.
Example: Let’s say you’re in the 4th year of contributing funds to a SIPP. Each year, you’ve allowed a limit of £40,000. In the combined period of 2016 and 2017, you contributed only £20,000. So you would have £60,000 of unused allowance and could carry over this unused allowance.
Can I continue my contributions after retirement/75?
Yes. You can certainly continue contributing to your SIPP once you’ve reached the age you’re going to retire, or after you’re 75.
Any contributions from this age onwards do not attract tax relief.
Note: Your annual allowance drops to £4,000 when you have taken the full 25% tax-free cash and started dipping into income drawdown.
What are the borrowing limits?
People borrow from their SIPPs all the time. If you’re one of those individuals, here’s what to expect:
- The lender assesses your plans to make sure they are in line with the rules laid down by the Department of Work and Pensions.
- The provider also assesses whether your project benefits the SIPP.
- If they consent to the loan, they give you anywhere up to 50% of the value of your SIPP.
Example: If your SIPP is worth £250,000 in cash deposits you could borrow up to £125,000, giving you up to £375,000.
- The lender holds the asset you’re borrowing against in lien while you repay the loan.
- The lender recovers the debt with money from your SIPP.
Although largely used for real estate, borrowers also use their SIPP for other borrowing purposes like emergencies or expensive acquisitions.
Speak to an expert advisor
Looking for more information about SIPP borrowing? Call us today on 0808 189 0463 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker pensions advisor who can provide the right expertise for your circumstances. We don’t charge a fee and there’s absolutely no obligation.