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 circ*mstances 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 |
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.
