SIPPs: Pay less Income Tax
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Turn £6,000 into £10,000 - without taking any investment risk.
- How do I do it?
- Tell me more about SIPP tax relief
- How much tax relief will I be entilited to?
- Tax band explanations
- What is the annual allowance for contributions?
- Need more information
How do I do it?
Contribute to your pension:
Pay £8,000 into your SIPP and the Inland Revenue will automatically rebate £2,000 back to your account. And if you are a higher rate tax payer you can claim a further £2,000 back via self assessment, turning a £6,000 contribution into a £10,000 pension fund without risking a penny
- a cool 66% return.
Please note: Higher earners may be subject to limits on higher rate tax relief available.
Tell me more about SIPP tax relief
All eligible pension contributions automatically qualify for basic rate tax relief:
- If you have UK earnings then you can contribute your entire income into your SIPP (subject to a 2009/10 cap of £245,000). You will qualify for basic rate tax relief automatically and for higher rate tax relief on that portion of your income that attracts a 40% tax rate.Please note: Higher earners may be subject to limits on higher rate tax relief available.
- If you do not have any UK earnings you can still pay a net contribution of £2,880 a year into your SIPP and receive basic rate tax relief of £720, which will bring your overall investment up to £3,600. You can also set up a SIPP for a child or spouse and pay the contributions on their behalf up to these limits.
How much tax relief will I be entitled to?
The amount of tax relief you will be entitled to will depend on your individual circumstances and most importantly, whether you are a higher rate tax payer or not.
Tax band explanations
An individual with no other allowances would start to pay higher rate tax over an income of £43,875 (calculated as your personal allowance plus the point at which the higher rate tax band applies). Income received over this figure would be eligible for higher rate tax relief if you decided to invest in a pension.
The standard tax bands:
| £ per year | 2009/10 |
|---|---|
| Personal allowance (under 65s) | £6,475 |
| Basic rate: 20% | £0 - £37,400 |
| Higher rate: 40% | Over £37,400 |
What is the annual allowance for contributions?
The annual allowance is £245,000 for 2009/10 and will increase each year as shown below.
The annual allowance may increase in future years, but this is not guaranteed.
All your pension contributions qualify for basic rate tax relief. Any contribution is net of basic rate tax: if you were to invest £800, an additional £200 would be collected automatically from the Inland Revenue on your behalf, added to your account, and be available to invest 6 to 11 weeks later. Higher rate tax payers making contributions on their own behalf can reclaim a further 20% through their self-assessment forms.
Please note: Higher earners may be subject to limits on higher rate tax relief available.
Need more information
Please refer to our Key Features document for further details
Example 1
Question: John is a higher rate tax payer (HRTP), earning £60,000 per year. He wants to make a £10,000 gross contribution to his SIPP. How much does he pay and how does it work?
Answer: John pays £8,000 into his SIPP. A few weeks later his SIPP is automatically credited with a £2,000 Inland Revenue rebate to take his investment up to £10,000.
As John is a HRTP he will be entitled to a further £2,000 tax rebate (£10,000 x 20%), which he can claim through self assessment or by having his tax code changed.
Example 2
Question: Helen is a basic rate tax payer (BRTP), earning £30,000 per year. She wants to make a £10,000 gross contribution to her SIPP. How much does she pay and how does it work?
Answer: Helen pays £8,000 to her SIPP. A few weeks later her SIPP is automatically credited with a £2,000 Inland Revenue rebate to take her investment up to £10,000.
As Helen is a BRTP she will not be entitled to any further tax relief.
Example 3
Question: Jayne is a HRTP, earning £50,000 per year. She wants to make a £10,000 gross contribution to her SIPP. How much does she pay and how does it work?
Answer: Jayne contributes the net figure of £8,000 to her SIPP. A few weeks later her SIPP is automatically credited with a £2,000 Inland Revenue rebate to take her investment up to £10,000.
As Jayne is a HRTP she will be entitled to some further tax relief. However, not all of her £10,000 gross contribution is eligible for higher rate tax relief as Jayne only pays higher rate tax on £6,125 of her income (£50,000-£43,875: see tax bands). She will get additional tax relief of £1,225 (£6,125 x 20%) which she can claim through her self assessment or by having her tax code changed.
