SIPP Taxes: Understanding Your Liabilities

SIPPs benefit from tax relief on contributions and tax-efficient growth, but withdrawals are subject to income tax. Understanding the tax implications can significantly impact the efficiency of retirement planning.
  • Last Updated: 22 Mar 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.


Francis Hui
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Key Takeaways
  • In the UK, SIPPS (Self-Invested Personal Pensions) are taxed on withdrawals, with the first 25% being tax-free and the remaining 75% taxed as income.
  • SIPPS offer seniors tax benefits such as tax-free growth and withdrawals of up to 25% of the total fund.
  • While it’s not possible to completely avoid taxes with SIPPS during retirement, you can strategically withdraw funds to minimise your tax liability.
  • After turning 65, you can reduce your tax bill by utilising the 25% tax-free withdrawal allowance that SIPPS offers.
  • By strategically withdrawing from your SIPP and reinvesting, you can utilise this retirement scheme for tax-efficient investing.

SIPPs and taxes are inextricably linked when it comes to aiming for a financially secure retirement. 

According to official government statistics, pensions tax relief is estimated to have amounted to £51,6 billion in the 2021/2022 year,1 underlining the importance of grasping how this principle applies to your SIPP. 

The relationship between your Self-Invested Personal Pension (SIPP) and taxes influences everything from the contributions you make to the capital gains you may earn and the withdrawals you’ll eventually make. 

In this article, we aim to demystify this interconnected subject, shedding light on how tax considerations can affect the performance and benefits of your SIPP. 

Whether your are well-versed in the world of investments or taking your first steps towards retirement planning, understanding the tax aspects of your pension will be extremely important if you’re trying to make the most of your retirement funds.

In This Article, You Will Discover:

    The Every Investor team’s here to provide reliable and trusted information on SIPPs and taxes, helping you make informed decisions regarding your financial future.

    All our articles undergo thorough fact-checking before publication so you can rest assured you’re receiving relevant, up-to-date information.

    Let’s get straight to it.

    What Is a SIPP?

    SIPPs enable account holders to have greater control over their pension funds, making investment decisions aligned with their financial goals and risk tolerance.

    What Are the Tax Implications of Using SIPPS for Equity Release in the UK?

    Utilising SIPPs for equity release in the UK can present a range of tax implications to be aware of. As a Self-Invested Personal Pension (SIPP) is a type of pension that gives you a higher level of control over your investments, any withdrawal is subject to income tax.

    Up to 25% of your pension pot can be taken tax-free, but the remaining 75% will be taxed as income at your marginal rate. However, it’s important to note that releasing equity through SIPPs can potentially push you into a higher tax bracket.

    The size of your equity release could inadvertently increase your annual income, which might make you liable for higher rates of tax. Also, in the unfortunate event of your death, if the SIPP is not in ‘drawdown’ then it may be subject to 40% inheritance tax.

    We advise careful planning and consultation with a tax expert to optimise your financial outcome.

    Do SIPPs Come With Tax Benefits?

    Yes, SIPPs (Self-Invested Personal Pensions) come with tax benefits. 

    These benefits include government tax relief on contributions, tax-free investment growth within the SIPP, and the option of taking a tax-free lump sum when you retire.2

    Let’s take a closer look at how tax relief works when it comes to SIPPs.

    What Types of Tax Relief Are There on SIPP Contributions? 

    There are two types of tax relief on SIPP contributions, namely Basic Rate and Higher Rate Tax Relief.

    Basic-Rate Tax Relief

    Basic-Rate Tax Relief represents a significant benefit when contributing to a SIPP, or any approved pension product, in the UK.3 

    Here’s how it works:

    When you contribute to your SIPP, the government will supplement your contributions with tax relief at your marginal rate of tax. 

    If you’re paying tax at the basic rate of 20%, in other words, this tax relief equates to 20% of your gross contribution.

    Let’s break this down with a simple example:

    When you pay £80 into your SIPP, this represents 80% of the total contribution, because this money’s been sourced from your taxed income. 

    In other words, you originally earned £100, but after 20% tax (£20) was deducted, you were left with £80.

    Now, when you contribute that £80 to your SIPP, the government effectively repays the £20 tax you initially paid, bringing your total contribution back up to the full £100. 

    This relief’s automatically added to your pension, so you do not need to do anything to claim it.

    Higher-Rate Tax Relief

    Higher-rate tax relief offers wealthier taxpayers in the UK the opportunity to claim further tax relief on pension contributions.4 

    This is above and beyond the 20% basic rate tax relief automatically applied to contributions.

    Here’s how it works:

    If your are a higher-rate taxpayer, you pay 40% tax on a portion of your income. 

    When you contribute to your SIPP, you automatically get 20% tax relief—but because your income’s taxed at 40%, your are entitled to an additional 20% tax relief to make up the difference.5

    Similarly, if your are an additional-rate taxpayer, you pay 45% tax on a portion of your income.6 

    In this case, your are entitled to an extra 25% tax relief on your pension contributions in addition to the basic 20%.7

    This additional tax relief can be claimed in one of two ways:

    • Through your tax return: If you complete a self-assessment tax return, you can include your pension contributions in the relevant section, which will result in a reduction in your overall tax liability, or potentially a tax refund.
    • By contacting HMRC: If you do not file a tax return, you can contact HM Revenue & Customs (HMRC) directly and inform them of your pension contributions and to provide some details about your contributions.

    As always, tax rules can be complex and subject to change, and the benefits depend on individual circumstances. 

    It’s therefore advisable to seek professional guidance from a qualified pensions or tax advisor.

    What’s Important to Know About Tax Relief on SIPP Contributions?

    What’s important to know about tax relief on SIPP contributions includes when this relief’s applied, what the age limit is, and how this benefit works if you don’t actually pay tax.

    When’s Tax Relief Added to SIPP Contributions?

    Tax relief’s usually added to SIPP contributions within about six to 11 weeks of your contribution (if you’re receiving Basic Rate Tax Relief).8 

    Additional tax relief for higher-rate taxpayers will have to be claimed through your tax return.

    Until What Age Does My SIPP Remain Tax Efficient?

    Your SIPP remains tax efficient until you reach the age of 75.9 

    Beyond your 75th birthday, you won’t receive any tax benefits on your contributions. 

    Can I Access SIPP Tax Relief If I’m Not a Taxpayer?

    Yes, you can access SIPP tax relief of 20% on contributions up to £2,880 if you’re not a taxpayer.10

    Are SIPP Investment Gains Taxed?

    No, SIPP investment gains aren’t taxed, meaning you won’t have to pay income tax, dividends tax or capital gains tax11 on your investment gains.12

    Do I Have to Declare My SIPP on My Tax Return?

    No, you don’t normally need to declare your SIPP on your tax return, unless you’re claiming additional tax relief for higher-rate tax or you’ve exceeded the annual or lifetime allowance.

    Where Do SIPP Contributions Go on My Tax Return?

    SIPP contributions go in the pension contributions section of your tax return. 

    If your are claiming additional tax relief as a higher-rate taxpayer, you’ll need to include your gross contributions.

    Do I Have to Declare SIPP Dividends on My Tax Return?

    No, any dividends earned on investments held within your SIPP are exempt from tax and do not need to be declared on your tax return.

    Will My SIPP Be Taxed When I Retire? 

    Yes, your SIPP will be taxed when you retire, but how this happens will depend on your tax band and how you withdraw your funds.

    How Are SIPP Withdrawals Taxed?

    SIPP withdrawals are taxed as income and the rate will depend on your overall taxable income in the tax year you make the withdrawal.

    Tax-Free Lump Sum & Annuity Options

    At retirement, you can take up to 25% of your SIPP’s value as a tax-free lump sum.13 

    The remaining funds can be used to purchase an annuity or go into drawdown, both of which will be taxed as income.

    Will My Heirs Pay Inheritance Tax on My SIPP Funds?

    Whether your heirs will pay Inheritance Tax on your SIPP funds will depend on whether you die before or after the age of 75.

    How does that work?

    If you die before 75, your SIPP can usually be passed on to your beneficiaries tax free; however, if you die after age 75, any SIPP funds inherited will typically be subject to income tax at your beneficiaries’ marginal rate.14

    Common Questions

    Are SIPPs Tax Free?

    How Does Tax Relief Work on SIPP Contributions?

    Can I Transfer My Existing Pension Into a SIPP Without Tax Consequences?

    Are There Any Restrictions on SIPP Withdrawals?

    What Happens to My SIPP in Terms of Tax When I Die?

    Do You Have to Pay Tax on SIPP Withdrawals?

    How Are SIPPS Taxed in the United Kingdom?

    What Are the Tax Benefits of SIPPS for Seniors?

    Can I Avoid Taxes with SIPPS in Retirement?

    How Can SIPPS Reduce My Tax Bill After 65?

    How to Use SIPPS for Tax Efficient Investing in Retirement?

    In Conclusion

    Navigating SIPPs and tax can be complex, and the rules can change, so it’s always wise to seek advice tailored to your circumstances. 

    The tax advantages associated with SIPPs, including tax relief on contributions, tax-free growth, and the ability to take a portion as a tax-free lump sum at retirement, can significantly boost your pension pot. 

    However, it’s crucial to be aware of the potential tax implications when withdrawing from your SIPP or passing on your pension wealth. 

    Therefore, staying informed about the intricacies of SIPPs and tax is key to making well-informed decisions and continually learning how to maximise your retirement wealth.

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