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        Updated: April 08, 2024

        SIPP Tax

        If you're looking for a long term retirement plan with plenty of tax advantages then a SIPP could be just what you need. Find out everything you need to know about tax and SIPPs here.

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        If you’re saving for retirement but want to keep control and have flexibility over how your money is invested, then a self-invested personal pension, known as a SIPP, can be a great option. A SIPP allows confident investors to pick and choose where they keep their savings, and to enjoy multiple tax benefits too.

        But what exactly are the tax advantages of a SIPP? In this article we’ll look at how tax relief works, whether you’re a basic, higher or additional rate taxpayer (or paying none at all) we’ll also look at other benefits when it comes to capital gains tax, inheritance tax, and taking money out of your pension.

        How does SIPP tax relief work?

        If you’re a UK taxpayer, any contributions you make to your SIPP (up to your annual allowance) are topped up by the government. This is known as tax relief and is one of the key tax benefits of a pension plan.

        The standard rate of tax relief paid to all taxpayers is 20%, so for every £800 you invest, the government will top it up to a gross amount of £1,000 – meaning they contribute 20% of the total. This basic tax relief will be managed by your SIPP provider and will be added at source.

        If you pay income tax at the higher or additional rate, you will need to claim back a further 20% or 25% through your tax return via self-assessment. This amount doesn’t get paid into your SIPP, but it reduces your overall tax liability, effectively meaning that your original contribution will cost you less.

        Can you get tax relief if you’re a non-taxpayer?

        Yes you can. If you pay no tax because you’re either unemployed or on a low income, you can still claim tax relief on SIPP contributions up to a maximum (gross) amount of £3,600 per year. This equates to contributions made by you of up to £2,880 (net) and a government contribution of £720 – 20% of the total. This is important for parents wishing to start a Junior SIPP for a child.

        SIPP tax relief calculations

        It can be difficult to understand how SIPP tax relief works in various financial circumstances and to calculate, so let’s take a look at an example.

        The table below shows what a £1,000 SIPP contribution actually costs at different income levels:

        Non-taxpayer Basic rate taxpayer (20%) Higher rate taxpayer (40%) Additional rate taxpayer (45%)
        Total SIPP (gross) contribution £1,000 £1,000 £1,000 £1,000
        Your (net) contribution £800 £800 £800 £800
        Government contribution (20%) £200 £200 £200 £200
        What you can claim on your tax return £0 £0 £200 (20%) £250 (25%)
        Amount the £1,000 contribution has actually cost you £800 £800 £600 £550

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        What are the other tax benefits of a SIPP?

        As well as tax relief on your SIPP contributions, there are several forms of taxation that saving with a SIPP wrapper can exempt you from, meaning your cash is able to grow more quickly and give you a better return.

        • Income tax – Any money that you earn within your SIPP through interest payments is free from income tax.
        • Capital gains tax – Capital gains tax is a levy you pay on any profit you’ve made between buying and selling a chargeable asset. This includes investment properties, stocks and shares. Within a SIPP, all of your investments are protected against any capital gains tax liability
        • Dividend tax – If you own shares as part of your SIPP investment portfolio, then the fund will be exempt from all dividend tax.
        • Inheritance tax – When you die, your SIPP is not included in your estate and so does not count towards assets liable for inheritance tax. Instead you can nominate beneficiaries to inherit your SIPP directly.
          If you are under 75 when you die, no tax is payable as long as the benefit is claimed within two years (although there are varying rules on this regarding the lifetime allowance – this is a complex area which your pensions advisor will be able to explain to you in more detail).
          If you are over 75, income tax is payable based on the beneficiary’s income. These SIPP tax rules apply whether your beneficiary takes money as a lump sum or regular income.

        Is income from a SIPP drawdown taxable?

        While your SIPP investments are able to grow free from any taxation, you may need to pay tax on your SIPP once you start to withdraw money from it.

        When you reach 55 (57 from April 2028), you have several options when it comes to how you take money out of your SIPP.

        You are entitled to take a lump sum of up to 25% from your SIPP completely tax free, even if you don’t then want to take a regular income straightaway. You can even continue to make contributions after withdrawing your lump sum. You don’t have to take this lump sum all in one go, it can be a series of smaller sums, up to 25% of the fund value. This is known as phased drawdown.

        For example, if you get to minimum pension age and have a SIPP pot worth £200,000, you can choose to take up to 25%, or £50,000, tax free. The remaining £150,000 can be left to grow further or taken as a regular income drawdown/annuity purchase, subject to income tax.

        Another way of taking lump sums from your pension is an uncrystallised funds pension lump sum or UFPLS. If you choose a UFPLS, you get the first 25% of each lump sum tax free, and pay income tax on the rest as you would with earned income.

        For example, if you want to retire with a SIPP pot of £300,000, you could choose to take a lump sum of £30,000 as a UFPLS. £7,500 (25%) of this would be tax free and the remaining £22,500 would be treated as taxable income by HMRC and taxed accordingly. You can withdraw further lump sums at any time on the same basis.

        If you decide to set up a drawdown to take a regular income from your SIPP, you will pay income tax at your marginal rate on this as though you were earning it through a regular job. This means you’ll have a personal tax allowance every year and be subject to the usual basic and higher rate thresholds for income tax, depending on how much income you take. Just like a job, any tax you owe will be deducted at source by your pension provider, before it is paid to you.

        Speak to an advisor who can help with your SIPP tax responsibilities

        SIPP taxation can be complex, especially when it comes to deciding how you take income from your SIPP after retirement. If you want to make sure you’re following the SIPP tax rules properly, whilst making the most of the SIPP tax benefits, it’s useful to take expert advice, even if it’s just to confirm you’re doing everything right.

        The pension advisors we work with who specialise in SIPPs offer a free pension review service, where they’ll look at your current situation, identify any potential areas for improvement and make recommendations based on your situation and financial goals. This service is completely free and with no obligation, so you’ve got nothing to lose.

        Give us a call on 0808 189 0463 or make an online enquiry now and we’ll arrange an initial chat with the advisor that we think is best placed to help you.

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        Although your SIPP growth isn’t subject to UK income or capital gains tax, it’s important to declare your contributions on your tax return if you are a higher or additional rate taxpayer as this is how you will get back your additional tax relief.

        If you are taking money out of your SIPP in retirement, any tax due will be deducted by your provider before it is paid to you, so declaring it on a tax return won’t impact your tax bill.

        Yes, your overall SIPP contributions are limited on an annual basis of up to £40,000 or 100% of your earnings, whichever is smaller.

        There is also a SIPP lifetime tax allowance, currently £1.073 million until 2026.

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        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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        Tony Stevens

        Tony Stevens

        Finance Expert

        About the author

        Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

        Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

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