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Your SIPP allowance explained

Tax-free pension allowance

With investment, your capital is at risk. Taxation depends on individual circumstances. Tax rules may change.

While it's a popular belief that SIPPs offer a tax-free pension allowance, they don't really. Here's how it works: the pension annual allowance is the amount you can pay into a pension that attracts tax relief, and the investments inside the pension grow free of capital gains tax and income tax.

Learn how the pension allowance works for SIPPs using our helpful guide. Discover how much you can pay in under the current SIPP rules.

Self-invested Personal Pensions (SIPPs) offer a wide range of benefits, with plenty of choice over where your money is invested.

As with other types of schemes, SIPPs also provide a generous pension allowance when making contributions every year. The Government sets this limit because your pension contributions are topped up with 20-45% tax relief.

Read on to find out answers to important questions, such as whether there are any specific HMRC SIPP rules.

How much is the SIPP lifetime allowance?

There is no specific SIPP lifetime allowance. The lifetime allowance - currently set at £1,073,100 - is the combined total you can hold across all your pensions over your lifetime. You will be taxed if your total pension savings exceed the lifetime allowance. If you’re drawing an income, your excess is taxed at 25% (plus income tax). And if you’ve taken a lump sum, your excess is taxed at 55%.

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How much is the annual SIPP allowance?

While this is a common question, there isn’t actually a specific annual SIPP allowance. Instead, your annual allowance is the combined amount that can be paid into your SIPP and any other UK registered pensions you have during the tax year.

This includes contributions from employers. You can usually pay as much as you earn annually, up to £40,000, into pensions each year without suffering a tax charge. A tax charge can apply if you contribute more than your annual allowance. Transferring SIPPs between providers doesn’t use up this allowance.

What is the tapered annual SIPP allowance?

This tapered allowance doesn’t just relate to SIPPs so there isn’t a tapered annual SIPP allowance. It is a taper that reduces the total amount that people with high incomes can pay into pensions (their SIPP and any other UK registered pensions) in a year. It affects those with an adjusted annual income of £240,000 or more. For every £2 of income above £240,000, the annual amount they can pay into a pension is cut by £1, down to a minimum of £4,000.

Is there a SIPP allowance for non-earners?

Non-taxpayers can make pension contributions of up to £2,880 a year and still receive 20% tax relief. This means the total amount paid into their SIPP or other pension in a year will be £3,600. It is also possible to pay the same amount into a pension for a child.

SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you then a SIPP might not be right for you. Please contact us for guidance or advice if you are unsure whether a SIPP is right for you.

Frequently asked questions

The amount you can pay into your SIPP depends on how much you earn and whether you or your employer are contributing to any other pensions for you. If your only pension is a SIPP, you can usually pay as much as you earn annually, up to £40,000, into your SIPP every year without suffering a tax charge (unless you’re a higher earner with a tapered allowance). You’ll also need to bear in mind that there is a maximum amount you can hold in all your pensions tax efficiently over your lifetime. This is £1.0731 million so if you only ever have a SIPP, this is the maximum amount allowed in it without suffering a tax charge.

If you exceed the annual pension allowance by putting more than £40,000 in your SIPP, a tax charge could apply. However, you may be able to avoid this charge by carrying over any unused allowance from the previous three tax years (a process named ‘pension carry forward’).

There is a maximum you can pay into a SIPP for a child each year. This is £2,880 a year. The Government will then add another 20% so the total amount saved into the child’s SIPP will be £3,600 a year. If the child is aged under 18, the SIPP must be held in the name of a parent or guardian but ownership of the SIPP will be switched to the child when they turn 18.

Can I increase my maximum SIPP contribution?

As with other types of schemes, the pension carry forward rules allow you to make SIPP contributions that exceed your annual allowance. If you paid less than your allowance into your SIPP and other pensions in any of the last three tax years, you can carry forward your unused allowance. This is provided you have held a SIPP or other UK registered pension for each of these three years and your total contributions don’t exceed your current earnings.

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