What is a SIPP and how does it work?

The amount you can save into a pension and earn tax relief on is capped each year, known as your Annual Allowance. There’s also a Lifetime Allowance, which is the total amount you can save into your pension without being hit by a tax charge.

You can pay in up to 100% of your earnings into a SIPP each tax year, up to a maximum Annual Allowance of £40,000.

You can also ‘carry forward’ any unused Annual Allowance from the last three years as long as you were enrolled in a pension scheme during that time. This can be helpful if you have a big lump sum that you want to invest one year.

If you’re a particularly high earner, you may get a lower Annual Allowance. For every £2 of income you receive over £240,000, you’ll lose £1 of your annual allowance, down to a minimum of £4,000. If you pay more than the Annual Allowance into your pension, you’ll have to pay what’s known as an Annual Allowance charge. The amount you’ll have to pay will depend on how much taxable income you have, and the amount of your pension savings that is in excess of the Annual Allowance. You’ll need to work out the rate or rates of tax that would be charged if your excess pension savings were added to your taxable income. HMRC has a useful Annual Allowance calculator to help you work out whether you have to pay tax on your pension savings.

It’s worth noting that once you’ve started taking money out of your pension, your Annual Allowance falls from £40,000 to £4,000 and becomes known as the Money Purchase Annual Allowance (MPAA). Learn more about this in our article What is the Money Purchase Annual Allowance? 

The Lifetime Allowance is the maximum you can save in your pensions over your lifetime, without having to pay any extra tax charges when you take money out of them. It doesn’t include any income coming from the State Pension.

In the current 2021/22 tax year, the Lifetime Allowance is £1,073,100. The Lifetime Allowance usually rises in line with the annual rate of inflation, but the Chancellor announced in the March 2021 Budget that it will be frozen at its current level until the end of the 2025/26 tax year.

You can find out more about how pension allowances work in our article Understanding your pension allowances.

Author: wpadmin

Leave a Reply

Your email address will not be published.