SIPP tax relief: understand the private pension tax rules and benefits

A Self-Invested Personal Pension (SIPP) is a government-recognised personal pension scheme. Unlike many standard workplace pensions, it gives you more freedom to choose how your money is invested, ranging from funds and shares to bonds and commercial property. Like other pensions, contributions are boosted by tax relief and growth within the fund is free from income tax and capital gains tax.

In this Moneyfarm blog we are going to see how tax relief on SIPP works and if it’s convenient compared to other pension schemes. Read also what is a SIPP.

What is SIPP tax relief and how does it work?

Tax relief is one of the main advantages of a SIPP. When you contribute, the government automatically adds 20% tax relief (known as relief at source). 

Example:

• You pay in £80

   

• HMRC adds £20

   

• A total of £100 goes into your pension pot

   

Higher and additional-rate taxpayers can claim an extra 20% or 25% respectively through their Self Assessment tax return. The additional relief reduces your tax bill rather than being added to your pension directly.

Even if you do not pay tax (e.g. a non-working spouse), you can still contribute up to £2,880 each year and receive tax relief, bringing your contribution to £3,600.

SIPP tax relief rules and limits

Residents and workers in the UK who are 75 years or older aren’t eligible for tax relief. The UK government limits the number of tax-deductible pension contributions you can make. The annual savings limit and the pension annual allowance also limit your SIPP tax relief.

If your pension savings exceed a certain amount, you must usually pay a tax charge.

Under the carry-forward rule, if you have already used your annual pension allowance, you may still be able to contribute more by using unused allowances from the previous three tax years. The standard annual allowance is £60,000, capped at 100% of your annual UK earnings. In some cases, this means you could contribute more than £60,000 in a single year if you have sufficient unused allowance available.

The maximum tax-free lump sum you can normally take is 25% of your pension savings, subject to an overall limit of £268,275. Any further withdrawals are treated as taxable income. A wider cap of £1,073,100 also applies to the total amount of tax-free lump sums you can receive across all your pensions during your lifetime.

Higher rate tax relief (40% or 45%) is available if you pay tax at those rates, though this must be claimed through self-assessment. From age 55 (rising to 57 in 2028), you can usually begin accessing your pension, with up to 25% tax-free and the rest taxed at your marginal income tax rate.

How much will I get from the SIPP tax relief?

Your income tax bracket determines the amount of SIPP tax relief you can receive.

Higher-income earners-rate or Additional-rate taxpayers can claim additional tax relief on their self-assessment tax returns than basic rate taxpayers.

It is critical that you are aware of the pension annual allowance, which limits the number of pension payments on which you can claim tax relief.

How to claim SIPP tax relief

Tax relief is applied differently depending on the type of pension. For a Self-Invested Personal Pension (SIPP), contributions are made using the relief at source method, where basic-rate tax relief of 20% is added automatically to your payments.

If you are a higher-rate or additional-rate taxpayer, you can claim the extra relief due to you through your annual Self Assessment tax return.

Once you start drawing from your pension (for example, through income drawdown), the Money Purchase Annual Allowance (MPAA) applies. This reduces the maximum annual contribution eligible for tax relief from £60,000 to £10,000 (2025/26).

To ensure you receive the correct level of relief, you may need to use a tax calculator, complete your Self Assessment return, and claim any additional pension tax relief.

SIPP Tax relief rates

England, Wales, or Northern Ireland

In England, Wales, or Northern Ireland, you can claim tax relief. On your Self Assessment tax return, you can claim additional tax relief for the following contributions to a private pension:

• 20% for basic-rate taxpayers
• 40% for higher-rate taxpayers (for anyone earning over £50,270 annually)
• 45% for additional rate taxpayers (for anyone earning over £124,140)

Scotland

Income tax and pension tax relief are applied slightly differently in Scotland.

The Scottish income tax rates are:

• Starter rate: 19% (up to £2,306 of income)
• Basic rate: 20% (from £2,307 to £13,991)
• Intermediate rate: 21% (from £13,992 to £31,092)
• Higher rate: 42% (from £31,093 to £62,430)
• Top rate: 47% (over £125,140)

SIPP Tax relief for non-taxpayer or unemployed

If you have little or no taxable income, such as a non-working spouse or child, you can still receive tax relief on pension contributions. You may contribute up to £2,880 each tax year, and HMRC will add 20% (£720), giving a total of £3,600 gross paid into your pension.

If you are a non-taxpayer, including non-working spouses or children, or have a low income, you are still eligible for a 20% tax break. This is equivalent to the £2,880 personal pension contribution you make each tax year.

You  can save 100% of your income into a pension and receive tax relief as long as your annual allowance does not exceed £60,000.  Ensure you have sufficient knowledge and experience in making investment and pension decisions.

Key Takeaways

• A Self-Invested Personal Pension (SIPP) allows greater control over investments while offering the same tax advantages as other pensions.
• Basic-rate tax relief of 20% is added automatically to contributions, with higher and additional-rate taxpayers able to reclaim extra relief through Self Assessment.
• The annual allowance for 2025/26 is £60,000, or 100% of earnings if lower. Unused allowance can be carried forward for up to three years.
• Non-taxpayers can benefit as up to £2,880 are topped up to £3,600 each year by HMRC.

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