How to claim SIPP tax relief

06/03/2020

Is a SIPP tax free? It’s a question we hear a lot. And the answer is both ‘yes’ and ‘no’. SIPPs have several tax benefits. But there are tax liabilities too. Here’s a quick explanation, along with information on how to claim SIPP tax relief.

Is a SIPP tax free?

In a nutshell, paying into your SIPP is tax free and withdrawing from your SIPP is taxed (although you can withdraw 25% tax free). Let’s elaborate.

Your SIPP contributions will receive tax relief based on your marginal rate of income tax. Here are some examples.

If you are a basic rate taxpayer, each personal pension contributions made into your SIPP will be immediately uplifted by 20% by the Government. A contribution of £800 would see the government will add £200 to top up your total SIPP contribution to £1,000.

The deal is even better if you are a higher rate (40%) or additional rate (45%) taxpayer. To reach a contribution of £1,000 you will effectively only have to contribute £600 (higher rate) or £550 (additional rate) yourself, with the rest made up of direct government contributions and income tax rebates via self assessment.

As you can see, paying into a pension fund is incredibly tax efficient. But what about withdrawing?

You can withdraw 25% of your SIPP fund tax free. That can be structured as a single lump sum, or you could take it in stages and choose to receive tax relief on the first 25% of each drawdown payment. Either way you will only pay tax on 75% of your pension fund. This will be in the form of income tax, payable at your marginal rate at the time of drawing and deducted at source by your SIPP provider.

How to claim SIPP tax relief

If you pay income tax at the basic rate, you don’t need to lift a finger. For every pension contribution you make, the government will automatically pay an additional 20% directly into your fund. The same applies for higher rate and additional rate taxpayers: 20% will automatically be paid into your fund. The remaining 20% (or 25% for additional rate taxpayers) will be paid to you in the form of a rebate from HMRC. You would generally apply for this rebate via self-assessment.

>> How to get tax relief on pension contributions for high earners

Are SIPP dividends tax free?

Yes.

Regardless of how your pension pot accumulates from the investments held within, it accumulates tax free. No income tax and no capital gains tax are due on the investment returns. As discussed above, you only pay tax on your SIPP when you begin to withdraw from it.

How much can you pay into your SIPP each year?

You can invest up to £40,000 into your SIPP each tax year and receive tax relief, although any money you pay personally is limited to your ‘net relevant earnings’. ‘Net relevant earnings’ effectively is your salary, bonus, overtime or commission. Dividends and investment returns (including buy to let income) do not fall within the ‘net relevant earnings’ definition.

You can also carry forward unused annual allowances from up to three previous tax years to make larger contributions, although very high earners need to be aware of the tapered annual allowance. There’s an explainer in the article below.

>> Tapered annual allowance: examples to simplify your tax 

How can Prydis help you?

Firstly, we are experts in wealth management, retirement planning and tax provision. Secondly, we have created our own SIPP service that incorporates all the features of a modern managed fund at a competitive price. You can even monitor the performance of your investments in our online client portal.

So whether it’s independent financial advice or more information on our SIPP service, feel free to get in touch for a free consultation – either by phone or at one of our UK offices. As part of our prestigious Chartered Financial Planners designation, we hold ourselves to rigorous standards of professional qualification, ethics and compliance.

We are here to help you plan your financial future with confidence.

James Priday

This article was written by James Priday

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