Three top tax tips for SIPPs

SIPPs can be a great way to boost your retirement savings. Not only do investments in a SIPP grow free of tax, but tax relief from the government generously top ups the money you pay in.

As SIPP tax relief is so valuable, I’ve drawn up three top tips to make the most of it. That includes how to shield yourself from a potential 60%-plus tax rate.

Though this article contains information and tips, it doesn’t give tax advice or personal recommendations. Pensions can’t usually be accessed until 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.

1. Claim your extra tax relief

When you pay into your AJ Bell SIPP, we’ll automatically claim 20% tax relief for you from HMRC. For example, if you pay in £2,000, you’ll end up with £2,500 in your SIPP after we add your £500 tax relief. This is basic-rate tax relief.

But if you pay income tax at a higher rate, you could be entitled to even more. To continue the above example, a higher-rate (40%) taxpayer could claim up to an extra £500, and an additional-rate (45%) taxpayer an extra £600.

Unlike at the basic rate, you don’t receive this extra tax relief automatically. It isn’t paid into your SIPP, either – instead, it works by reducing your tax bill for the year. To earn this extra tax relief, you’ll need to claim it from HMRC, usually by completing a tax return. Not everyone bothers doing this: it’s thought that hundreds of millions of pounds goes unclaimed every year.

If you missed the boat this tax return season, don’t worry – it’s possible to backdate pension tax relief claims by up to four years by contacting HMRC.

And if you’re a Scottish resident, you don’t even need to be a higher-rate taxpayer to claim further tax relief on your contributions. The Scottish intermediate tax rate of 21% also allows further tax to be reclaimed – though the rewards aren’t quite as valuable as for those paying tax at higher rates.

2. Avoid the 60% (plus) tax traps

Once your ‘adjusted net income’ hits £100,000, you’ll start to lose the tax-free personal allowance at a rate of £1 for every £2 of income above the threshold. This means you’ll pay an effective tax rate of 60% on the band between £100,000 and £125,140.

So, what’s ‘adjusted net income’ exactly? Basically, it’s your total income minus the money you pay into a pension (including a SIPP) and minus any gift aid donations you make to charity. So if you’re able to reduce your adjusted income to or below £100,000, you can avoid that 60% trap.

It’s a similar story for tax-free childcare, except the £100,000 threshold is a cliff edge. You’ll lose the £2,000 on offer per child as soon as your income hits this limit. This double whammy – losing your personal allowance and any tax-free childcare – can add up to a 90% tax rate on part of your earnings! If you find yourself in this situation, it could be a good idea to pay into your SIPP with the intention to save more for retirement, while also avoiding this 90% tax rate.

3. Claim tax relief even if you’re a non-earner

Did you know that even if you earn no income, or not enough to pay tax, you can still get tax relief on your SIPP contributions?

The amount of tax relief you’ll earn is lower, but still considerable. You can pay up to £2,880 into your SIPP each year, with the government adding 20% in tax relief. That’s a yearly boost of £720, adding up to £3,600 gross.

So if you have a non-working spouse or partner, it's worth letting them know about the tax relief on offer. Your children can benefit too. You can set up a Junior SIPP and make payments on their behalf that also receive the 20% basic rate tax relief – up to the same £3,600 allowance.

These tax allowances for non-earners renew each tax year but don’t carry over, so it’s a case of use it or lose it.

In my next article, I’ll turn from tax relief to another important perk of pensions – being able to carry forward your unused allowances.

More on SIPPs

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.