SIPP contributions, rules and 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 gets the same tax treatment as other pensions, but offers more control and flexibility over where you invest and, often, in how you take income.

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

However, they can be particularly helpful for people who don’t have access to a workplace pension, such as the self-employed.

Alternatively, if you have a handful of old pensions that you no longer pay into, you might find it easier to manage them by combining them into one SIPP.

How does a SIPP work?

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

If you have a regular income, you may pay money in every month. Alternatively, if you’re self-employed, you might decide to make larger ad hoc contributions when your cash flow allows.

A SIPP differs from other pensions because it allows you to choose your investments from a range of options, including shares, property and land, investment trusts, funds and exchange-traded funds.

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

However, it’s important to note that you need to decide where to invest your money; there’s no default option as there is with workplace pensions.

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 a traditional pension is the increased flexibility and control over your investments. 

With a SIPP, you can benefit from the same tax benefits as other pensions, including:

• 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). Income thereafter is taxed at your normal rate.

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 pay 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. 

These limits apply to your total pension savings, however, so you may have a lower allowance if you are paying into other pensions as well.

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 does agree 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 that for every £100 you pay into your pension, HMRC will top it up by a further £25.

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 using HMRC’s claim service.

Tax relief 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 as all your contributions are exempt from national insurance (NI) and income tax. However, pension contributions under salary sacrifice will be capped at £2,000 each tax year, so anything over this amount won’t benefit from NI savings from April 2029.

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

• Net pay schemes pay into your pension before tax. This means you get the full rate of relief that you’re entitled to automatically and won’t need to submit a claim to HMRC.

How much can I pay into a SIPP each year?

There is no minimum SIPP contribution, while the maximum contribution allowance is £60,000 (or 100% of your earnings, if lower). 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?

In some cases, you may be able to pay more than your annual allowance into your pension.

If you have used up your allowance this year, you may be able to carry forward any unused allowance from the previous three tax years and pay it into your pension.

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 have made a taxable withdrawal from your SIPP, you’ll trigger the money purchase annual allowance (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. 

This can catch you out if you decide to take an uncrystallised fund pension lump sum (UFPLS) out of your pension while you are still working and contributing to your pot.

For this reason, it’s worth getting financial advice before you start withdrawing your pension to make sure you don’t get stung.

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.