How is a SIPP Treated for Tax Purposes in the UK?
SIPPs have become a very popular method of retirement planning for many people across the UK, especially for those looking for the freedom and flexibility to control their own investment portfolio.
As with other UK pensions, one of the key advantages of a SIPP (self invested personal pension) are the nuumber of tax benefits available, in particular the income tax relief on contributions allowed by HMRC (Her Majesty’s Revenue and Customs).
In this article we’ll delve a little deeper to look at the tax benefits of a SIPP, how certain taxes may apply to your pension and in what circumstances.
- SIPP tax relief explained
- Does a SIPP allow me to take a tax-free lump sum when I retire?
- How is SIPP tax relief calculated?
- Is interest generated in a SIPP taxable?
- Could taking money from a SIPP affect my tax credits claim?
- Is a SIPP pension subject to typical inheritance tax rules laid out by HMRC?
- Frequently asked questions
- Speak to a SIPP tax expert
Once you’ve read through the details below if you’d like to know more about how tax relief on a SIPP is applied or if you have any other queries around SIPP taxation rules, make an enquiry and we can arrange for an advisor we work with to get in touch. All advice is free, impartial and tailored to your circumstances.
SIPP tax relief explained
A SIPP is classed as a money purchase or defined contribution (DC) scheme, therefore tax relief works in exactly the same way as all other personal pension plans.
What are the rules when claiming SIPP tax relief?
Claiming tax relief is allowed on all SIPP pension contributions up to a maximum of 100% of your annual earnings or £40,000 (for tax year 2019/20), whichever is lower.
How does SIPP tax-relief work in practise?
Basic-rate tax relief (20%) is claimed at source by your SIPP provider who receives this directly on your behalf from HMRC.
So, for example, if you contribute £10,000 per annum into a SIPP pension you will receive an additional £2,000 to your fund via HMRC, with no action required on your part.
How to claim higher rate tax-relief on a SIPP
If you’re a higher rate taxpayer you can claim further tax relief for your SIPP contributions from HMRC via a self assessment tax return. If you pay 40% income tax, you can claim a further 20% and if you pay 45% income tax you can claim a further 25%.
If you contribute to a SIPP and would like to know more about how to claim higher rate tax relief, get in touch and we will ask an expert to contact you to explain further.
Does a SIPP allow tax relief for non-taxpayers?
Yes, it’s possible. If you’re a non-UK taxpayer you can make contributions into your SIPP of up to £3,600 each year, including tax relief.
This means the actual contributions you could make would be £2,880 and HMRC would add a further £720 directly into your SIPP fund. This can be particularly attractive for parents who wish to open a Junior SIPP for their children.
If you’re a non-taxpayer or interested in taking out a SIPP for your children to take advantage of the tax relief available, make an enquiry and we’ll arrange for a specialist to get in touch.
Does a SIPP allow me to take a tax-free lump sum when I retire?
Yes, this is definitely an option available to you. Remember, a SIPP is a money-purchase scheme, therefore, you’re able to begin drawing down an income from your fund once you reach 55 years of age.
As with all other personal pension schemes, a SIPP will allow you to take a 25% tax-free lump sum before you begin taking any pension income.
How is SIPP tax relief calculated?
Any personal contributions you make into your SIPP (up to the amount you earn) is subject to a basic tax relief of 20%, though higher-rate taxpayers can claim a further 20% and additional-rate taxpayers 25% through a self-assessment made to HMRC.
For example, if these three taxpayers each respectively contributed £10,000 into their SIPP account per annum, the taxman would top each up by £2,000. The higher-rate taxpayer would get another £2,000 as a rebate from HMRC (taking it to £14,000), and the additional-rate taxpayer would get a further £2,500 (taking it to £14,500).
See the table below for more figures:
|Initial contribution:||Government top-up (20%):||How much you can claim back:||Total tax relief:|
*maximum contribution per year for non-taxpayers or those who earn less than this
SIPP corporation tax relief
Your limited company can contribute pre-tax company income into your SIPP, and because this can be treated as an allowable business expense, your company could save up to 19% in corporation tax.
Is growth generated in a SIPP taxable?
No, your interest can grow free of any income tax and capital gains.
This is because any interest your SIPP investments accumulate is paid directly into the SIPP, so any interest you generate is tax-free. However, any income you take out of the SIPP account is classed as pay-as-you-earn (PAYE) income, and will be taxed as standard.
Could taking money from a SIPP affect my tax credits claim?
Your tax credits could be affected if you wish to start drawing down an income from your SIPP.
If you start drawing down an income from your pension while you’re still in employment, be aware that this taxable income from your pension is also seen as income for the purposes of tax credits (although the 25% tax-free portion of your pension is not included).
Because of this, taking an income from your pension could mean that you have to pay back a portion of your tax credits, as you may have been paid too much. This could also have a knock-on effect for the following tax year, as tax credits are worked out using yearly rates and figures. .
If you plan to leave employment and start drawing down your pension, you may be entitled to other benefits, including Pension Credit. This provides an additional retirement income if you are on a low income and comes in two parts: Guaranteed Credit (tops up your weekly income), and Savings Credit (provides extra income if you’ve contributed to your retirement that isn’t the state pension).
For more information about SIPP and tax credits, make an enquiry.
Is a SIPP pension subject to typical inheritance tax rules laid out by HMRC?
Another great advantage of a SIPP pension relates to how it is treated for inheritance tax (IHT) purposes by HMRC.
When you die your SIPP funds remain outside of your estate, passing simply to any number of nominated beneficiaries and can, therefore, be quite effective from an IHT planning perspective.
A beneficiary could be:
- A spouse
- Children and/or grandchildren
- Relative outside your immediate family
- Close friend(s)
- Nominated charity
You can allocate the amounts across beneficiaries as you wish, so, for example, you could give 50% to your spouse and split the rest amongst children and/or other relatives in equal amounts.
If you die before you reach the age of 75, providing you have nominated your designated beneficiaries, they will be allowed to receive their allocation of your SIPP pension without incurring any income tax liability.
If you die beyond the age of 75, then whatever SIPP funds are received by the beneficiary will be taxable at their marginal rate. Either way, there is no inheritance tax liability on the SIPP funds allocated.
If you currently contribute to a SIPP pension and would like to know more about how it can help with inheritance tax planning, get in touch and we can ask an advisor we work with to speak with you directly.
Frequently asked questions about the taxation of a SIPP
Got a question about SIPP tax that we haven’t yet answered? Read below for more related topics, or send us a message with your query.
Are the proceeds from SIPPs subject to capital gains tax?
No, another benefit of SIPPs is that all of the funds, while invested, are not subject to either income or capital gains tax.
Whilst income tax may be liable once you commence drawdown on your pension, capital gains tax does not apply on any proceeds taken from a SIPP.
Are SIPP dividends tax-free?
Yes, they are. Any income tax paid on dividends from stocks or shares (or other investments where dividends are paid) held within a SIPP pension fund will be reclaimed by the provider and re-credited to your account.
Your provider should send you an annual report showing a breakdown of your SIPP investment portfolio which should include a consolidated tax certificate indicating any tax rebates received from any underlying investments.
Can I carry forward any unused tax relief from a SIPP?
Yes, this is possible. In order to capture any unused tax relief from previous years, you must first make the maximum contribution for the current tax year (for 2019/20 this is £40,000 or your annual earnings, whichever is lower). You can then use any unused annual allowances from the previous three tax years.
So, for example, if you make the maximum contribution allowed for this tax year (2019/20) you then have the option to carry forward unused relief from the following tax years:
You must start with the last tax year of the three (2016/17) and work forward from there.
Speak to a SIPP tax expert
If you currently contribute to a SIPP or are considering doing so and would like to speak with an expert in order to find out more about the tax treatment of this type of pension, call us today on 0808 189 0463 or make an enquiry here.