Archived article: Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
It should be an easy question for investors to answer. But because of pension rules, working out how much you can pay into your SIPP takes a bit of homework.
In this article, I’ll explain how these pension rules work, and what to think about when calculating how much you can pay in.
This article gives you information and tips, but isn’t tax advice or a personal recommendation. Pensions can’t usually be accessed until you reach age 55 (rising to 57 in 2028), and pension and tax rules may change in the future. If you need help with tax or your investments, it’s a good idea to get professional, regulated advice.
A tale of two halves
There’s actually no hard limit on what you can pay into your SIPP. But crucially, there is a limit on how much you can pay in while enjoying the tax advantages of a pension. This limit is set by two things:
- Your UK earnings
- Your available annual allowance
Let’s take these two in turn.
Earnings
Most UK residents can pay as much into their pensions per year as they earn. So if you earn £40,000, that's how much you can personally pay into your SIPP per year.
Keep in mind this figure includes tax relief. So in the above example, you could pay in up to £32,000, with the government adding the rest (as 20% tax relief) to make it £40,000 in total.
Any money your employer also pays in isn’t limited in this way.
Earnings can be tricky to nail down if your income fluctuates or you’re self-employed.
To give you an idea, earnings include your salary, bonuses, and profits you make doing business as a sole trader or partner. But they don’t include income from investments or buy-to-let, or money you pay yourself as dividends.
If you earn £3,600 or less, you can add up to £3,600 into your SIPP, which is the basic gross amount. The net amount would be £2,880.
Annual allowance
There’s also the annual allowance to think about, which covers all money paid into all of your pensions in a tax year. That includes money you pay in personally, money your employer adds, and the tax relief top-up from HMRC.
For most, the annual allowance has increased to £60,000 per year on 6 April 2023. But if you have a high income (over £260,000) or have already started to take income from your SIPP (or other ‘money purchase’ pension), you’ll have a lower allowance.
If the total amount paid into your pensions is above your annual allowance for a tax year, you might have to pay a tax charge.
For some people, their earnings will act as a limit. For others, it will be the annual allowance.
Keep calm and carry forward
If you’re over your annual allowance (standard or tapered) for the current tax year, you might be able to ‘carry forward’.
Carry forward allows you to use not just this year’s annual allowance, but also any unused annual allowance going back three tax years. Importantly, this can reduce or even eliminate any tax charge for exceeding your annual allowance in the present tax year.
Carry forward works in a strict order. You use up your allowance from the current tax year first, then the previous three tax years, starting with the earliest tax year first.
For 2023/24, this means using up the current year’s allowance first, before using the 2020/21 year, then 2021/22, and finally 2022/23.
Keep in mind that even though the standard annual allowance is now £60,000, before 6 April 2023 it was £40,000.
If you’re using up the allowance by making a personal contribution, just remember that you must have sufficient UK earnings equal to or greater than the value of your gross personal contributions in the current year.
Case study – Amira
Amira is 45 and earns £120,000 a year, before tax.
Her employer contributes 10% of her salary each year to a workplace pension, and she pays a total of 5% (gross) from her salary before tax.
She wants to know how much she could pay into her SIPP without paying a tax charge.
There are three steps to find the answer:
- Work out any remaining allowance for this year.
- Calculate what carry forward is available.
- Work out if Amira’s UK earnings enough to cover this and the contributions she’s already paid.
Step 1
Amira currently pays in £6,000 gross (5% of £120,000) and her employer pays in £12,000 (10% of £120,000). That uses £18,000 of her annual allowance for this tax year, with £42,000 remaining.
Step 2
The contributions for and by Amira over the last three years were:
| Tax year | Annual allowance | Total contributions | Carry forward available |
|---|---|---|---|
| 2020/21 | £40,000 | £30,000 | £10,000 |
| 2021/22 | £40,000 | £12,000 | £28,000 |
| 2022/23 | £40,000 | £10,000 | £30,000 |
| Total carry forward | £68,000 |
Adding the annual allowance remaining for this year (£42,000) to the total carry forward (£68,000) gives Amira an ‘available annual allowance’ of £110,000 gross.
Step 3
Amira’s earnings are £120,000, and she’s already personally paid in £6,000 (gross).
If she was able to make the maximum extra contribution of £110,000 gross, her earnings would cover it. She could make a net contribution of £88,000 to her SIPP, with £22,000 basic rate tax relief claimed from HMRC. Amira can then make a claim for higher rate tax relief by contacting HMRC or completing a self-assessment tax return.
Carry forward – what else you need to know
There are some important things to keep in mind if you want to use carry forward.
- You must have been a member of a pension scheme in the year you want to carry forward from.
- If you’re subject to the tapered annual allowance, your carry forward will be limited by whatever your reduced allowance was in that year. You can read more in our guide to annual allowance tapering.
- If you’ve activated the money purchase annual allowance, carry forward is no longer available.
Tax treatment depends on your individual circumstances and rules may change. Pension rules apply. You cannot pay contributions of more than your earnings in a tax year. Your allowance may also be lower if you have a high income or have flexibly accessed your pension benefits.
These articles are for information purposes only and are not a personal recommendation or advice.
Charlene Young: Senior Pensions and Savings Expert
Charlene Young is AJ Bell’s Senior Pensions and Savings Expert. She joined AJ Bell in 2014 from a wealth management firm where she worked with private clients and small businesses as a financial planner.
Charlene...
