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SIPP tax benefits

Pensions, such as a SIPP, are one of the most tax efficient ways of saving for retirement. Pension contributions receive up to 45% tax relief. How much will depend on your circumstances.

How you could turn £8,000 into £10,000

SIPP benefits - Basic rate of tax payer illustration

If you invest £8,000 (net) in a SIPP, the government automatically adds £2,000 (20%) basic rate tax relief increasing your total contribution to £10,000 (gross).

Remember, tax rules can change over time and the relief you receive will depend upon your circumstances.

Download our Guide to Pension Tax Relief

How you could turn £6,000 into £10,000

SIPP benefits - Higher rate of tax payer illustration

If you invest £8,000 (net) in a SIPP, the government automatically adds £2,000 (20%) basic rate tax relief. You can claim back up to a further £2,000 (20%) higher rate tax relief via your tax return. £10,000 (gross) in a SIPP could therefore cost you as little as £6,000.

You can do what you like with the higher rate tax you get back. Some clients reinvest it in their SIPP and receive another round of tax relief.

You must pay sufficient tax at the higher rate to claim the full higher rate tax relief via your tax return. Remember, tax rules can change over time and the relief you receive will depend upon your circumstances.

You could get up to 60% tax relief if you earn more than £100,000

Download our Guide to Claiming Higher Rate Tax Relief

Download our Guide to Pension Tax Relief

How you could turn £5,500 into £10,000

SIPP benefits - Additional rate of tax payer illustration

If you invest £8,000 (net) in a SIPP, the government automatically adds £2,000 (20%) basic rate tax relief. You can claim back up to a further £2,500 (25%) higher and additional rate tax relief via your tax return. £10,000 (gross) in a SIPP could therefore cost you as little as £5,500.

You can do what you like with the higher/additional rate tax you get back. Some clients reinvest it in their SIPP and receive another round of tax relief.

You must pay sufficient tax at the higher/additional rate to claim the full tax relief via your tax return. Remember, tax rules can change over time and the relief you receive will depend upon your circumstances.

Download our Guide to Claiming Higher Rate Tax Relief

Download our Guide to Pension Tax Relief

You don't need earnings to receive tax relief

SIPP benefits - Non tax payer rate illustration

If you have no earnings (for example, the retired, non-working spouses or children) you can still contribute up to £3,600 gross each tax year to a pension and receive 20% tax relief.

If you contribute the full £3,600, the government will automatically pay £720 in tax relief, reducing the amount you pay to just £2,880.

Remember tax rules can change over time and the relief you receive will depend upon your circumstances.

Download our Guide to Pension Tax Relief

Making contributions using 'Salary Exchange'

Your employer may choose to use 'Salary Exchange' as a way of contributing to the SIPP. This is a different method to the one detailed above.

Salary Exchange (or 'Salary Sacrifice' as it's often called) means instead of contributing from your net pay (after tax and National Insurance), you agree to reduce your salary and have the equivalent amount paid into your SIPP as an employer contribution.

For instance, if you reduce your salary by £5,000 in a year, you won't pay Income Tax or National Insurance on that amount and you'll have £5,000 in your pension.

How do I benefit?

  • No employee NIC payable on your contribution
    Your Salary Exchange contribution will be made as an employer contribution, and employer contributions are not subject to NIC or income tax.
  • No income tax payable on your contribution
    You will immediately save Income Tax at the highest rate you pay, avoiding the need to reclaim any higher or additional rate tax relief from HM Revenue and Customs (HMRC).

Does the reduction in salary have any knock-on effects?

This list is not intended to be exhaustive, but please consider the following issues before taking up Salary Exchange. If you could be adversely affected you should seek financial advice.

State benefits »

State benefits will be based on your revised salary. This may include Statutory Maternity Pay, Statutory Redundancy Pay, Statutory Sick Pay, Working Tax and Child Credit and Additional State Pension.

Earnings below HMRC thresholds »

If you earn below the Primary Threshold you will not make any NIC savings by using Salary Exchange. If your total income is below your personal allowance (the level above which Income Tax is payable) you will not benefit from tax relief.

Student loans »

Repayments may reduce or stop if your salary falls below the repayment threshold, so it will take longer to repay your loan.

Other benefits »

A reduction in salary could affect mortgage and credit applications and the maximum cover available on life and health insurance policies.

Tax relief »

If you are a higher or additional rate taxpayer and currently reclaim tax relief on pension contributions via a method other than Self-Assessment, we would recommend you contact HM Revenue & Customs and notify them that you will be participating in a Salary Exchange arrangement and reclaiming tax relief through payroll. This will help to avoid underpaying tax in this respect.

Additional tax benefits

  • No capital gains tax or further income tax
    Investments in a pension can grow free of UK capital gains tax and further income tax.
  • Up to 25% tax-free lump sum when you retire
    Anytime from age 55, you can normally take up to 25% of your SIPP as a tax-free lump sum, and a taxable income from the remainder if you wish.
  • No inheritance tax if you die before retiring
    If you die before taking benefits from your pension, and before reaching age 75, the fund will normally be passed to your spouse or other elected beneficiary free of inheritance tax.

Important information

The pension and tax rules are subject to change by the government. Tax reliefs and state benefits referred to are those currently applying. Their value depends on your individual circumstances.

Important information

You can't normally access the money in a SIPP until at least age 55 (57 from 2028). Please remember taxation depends on your circumstances and tax rules can change over time. Investments can go down in value as well as up so you could get back less than you invest. This website is not personal advice; if you are unsure of an investment's suitability for your circumstances you should seek advice. Correct for 2021/2022 tax year.

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invest@hl.co.uk

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