SIPP contributions, rules & limits: how much can you pay in?

A self-invested personal pension (SIPP) can be useful if you’re saving for retirement.

We look at how SIPP contributions work, the annual limits and more.

What is a SIPP?

A SIPP is similar to a traditional personal pension, but provides more flexibility in how you can invest your money for retirement by offering a range of investment options.

Any UK resident (or person working overseas with UK earnings) under 75 can set up and pay into a SIPP.

How does a SIPP work?

Payments can be regularly scheduled or one-off, depending on your preferences.

However, a SIPP is distinct as it allows you to choose your investments from a range of options, including shares, property and land, investment trusts and collective investments.

You can choose your investments or work with a financial adviser to select the right ones for your SIPP.

A SIPP offers savers a way to grow their wealth and benefit from decent returns over an extended period, but there are some important considerations and rules to be aware of.

Why should you consider a SIPP?

The most significant difference between a SIPP and traditional pension is the increased flexibility and control over your investments. 

With a SIPP, you can benefit from: 

• Tax-free growth: Contributions grow without incurring income, dividend or capital gains tax.

• Government tax relief: Contributions qualify for tax relief. Basic-rate taxpayers receive tax relief at source, so a £2,000 contribution effectively becomes £2,500 in your SIPP. Higher-rate taxpayers can claim an additional 20% through self-assessment, while additional-rate taxpayers can claim an extra 25%.

• Tax-free withdrawals: You can withdraw up to 25% of your SIPP as a tax-free lump sum when you reach age 55 (although the normal minimum pension age is rising to 57 from 6 April 2028).

You’ll have to pay fees associated with your SIPP and should budget accordingly.

For instance, the cost of hiring a financial adviser to manage your investments or the fees to buy and sell shares. 

How do SIPP contributions work?

You can put 100% of your income into a SIPP each tax year up to the maximum of £60,000, which includes personal pension contributions, employer contributions and tax relief. 

Anything above this amount will not be eligible for tax relief. If you aren’t working, you can contribute up to £3,600 a year, equating to £2,880 from you and £720 in tax relief. 

If you’re working, you can ask your employer to contribute to your SIPP, but there are a couple of complications.

Your employer will have its own workplace pension scheme, and many employers prefer to stick with their own scheme. In addition, not all SIPPs allow employer contributions.

If your employer agrees to pay into your SIPP, they can contribute either by cheque, direct debit or BACS. There’s no limit to the amount an employer can contribute besides the £60,000 cap for tax relief. 

How does tax work on SIPP contributions?

When you pay into your SIPP, you automatically receive tax relief of 20% on your contributions. This means a contribution of £80 will be boosted by a further £20, becoming £100 in total.

Higher and additional rate taxpayers get a further 20% or 25% tax relief, but will need to claim this through their tax return or by writing to HMRC with details of their pension contributions.

Tax on SIPP contributions from an employer works slightly differently depending on how the scheme is set up:

• Salary sacrifice is the most tax-efficient option and means all your contributions are exempt from national insurance and income tax. However, pension contributions under salary sacrifice will be capped at £2,000 each tax year from April 2029.

• Relief at source schemes pay in 20% tax relief automatically, and higher-rate taxpayers will need to claim the rest through their tax return.

• Net pay schemes pay into your pension before tax, so basic rate taxpayers get 20% relief, while higher-rate taxpayers get 40%.

How much can I pay into a SIPP each year?

There is no minimum SIPP contribution, while the maximum contribution allowance is £60,000. If you pay more than £60,000 into your SIPP within a financial year, you’ll face a tax charge.  

There’s also a tapered annual allowance, first introduced in April 2016, which applies to exceptionally high earners. 

If your income is over £200,000 annually, for every £2 of adjusted income over £260,000, your pension allowance will be reduced by £1.

The biggest reduction in the annual allowance is £50,000, so your annual allowance could be cut to £10,000 if you earn £360,000 or more.

Can you carry forward any SIPP allowance?

You can carry forward your SIPP allowance, so you can contribute more than the annual pension allowance without any tax charges. 

It’s available to those who have used up their allowance for the current year but have unused allowance in any of the last three tax years.  

Before carrying unused allowance forward, it’s worth talking to a financial adviser.

Different rules may apply depending on whether you’ve started drawing income from your SIPP. 

Does taking an income from your SIPP lower your annual allowance?

Once you start taking a taxable income from your SIPP, you’ll trigger the MPAA. 

When the MPAA is activated, the amount you can put back into the pension pot each year will drop to £10,000. In other words, £8,000 from your contributions and £2,000 in tax relief.  

The MPAA only applies once you take taxable income - it’s not triggered by taking your tax-free lump sum. It’s worth getting financial advice before you start withdrawing your pension to make sure you’re not caught out.  

Get expert financial advice

Understanding how SIPPs work can be a game-changer for your retirement planning. With their flexibility, control over investments, and significant tax benefits, SIPPs offer a powerful way to grow your pension pot.

Whether you're looking to maximise your contributions, benefit from tax relief, or plan for tax-free withdrawals, a SIPP can provide a tailored solution to suit your needs.

However, navigating the rules and making the most of your SIPP requires careful planning and professional advice. By staying informed and proactive, you can make the most of your SIPP and secure a comfortable retirement.

Unbiased can quickly match you with a financial adviser for expert financial advice tailored to your retirement planning needs, including how to maximise the benefits of your SIPP.