What are the limits on SIPP contributions?

If you have been thinking of setting up a personal pension, you may have come across the term SIPP. However, you may not be quite sure what they are, how they work, or how they differ from traditional personal pensions. This often leads to the commonly asked question "what are the limits on sipp contributions?"

Here, we’ll provide a brief outline of what SIPPs are, the basics of how they work, and explain the key limits on SIPP contributions you need to know each year.

What is a SIPP, and how does it work?

A self-invested personal pension (SIPP) is a type of defined contribution personal pension. SIPPs are like standard personal pensions. However, they give you more freedom to choose a range of investment options to include in your fund.

It's an investment portfolio within a pension wrapper, and you have control over where you invest your money. You have access to a wider range of investment options than other personal pensions, and they are very flexible.

If you are confident with investing, you can manage your funds yourself. Alternatively, most SIPP providers offer professional fund managers to their clients. However, you would need to pay fees depending on the level of service you choose.

Another option is to employ an FCA-Regulated financial advisor to provide a discretionary managed service. In this case, they would make the day-to-day investment decisions on your behalf. You will need to pay fees to the advisor based on the level of service they supply.

Is it worth considering a SIPP?

The main difference between a SIPP and a traditional pension is that you have more control over your investments. In fact, they are extremely flexible.

However, your SIPP will come with various fees, and you need to budget for these accordingly.

For example, there will be annual management fees, set-up fees, platform and admin fees. In addition, there may be holding charges and investing or share dealing fees.

Before deciding on a SIPP, you or your financial advisor should research and compare all fees. Therefore, it's important to compare providers, as excessive charges can reduce your investment returns.

In general, the rules for SIPPs are the same as those for other types of pensions, including the limits on SIPP contributions. You will still benefit from the same tax relief and tax-free growth, as well as the same lifetime and annual allowances.

You can also access your funds in the same way as you can with other personal pensions. At this moment, this is from the age of 55, rising to 57 in 2028. You can withdraw up to 25% of your SIPP as a tax-free lump sum when you reach your normal minimum pension age.

SIPP contributions, how do they work?

SIPP contributions include your personal payments, your employer’s contributions, and government tax relief.

Each tax year, you can put 100% of your income into your SIPP, but only up to the maximum SIPP contribution limit, which is currently £60,000 per tax year. You will not be eligible for tax relief if you exceed this amount. As a result, understanding the rules and limits on SIPP contributions is key to avoiding unexpected tax charges.

If you aren’t earning, you or someone else can pay up to £3,600 each tax year into your SIPP. In other words, £2,880 from personal payments and £720 added in tax relief.

All payments made that are not from employers are seen to be the same as if you made it yourself for tax purposes.

If your employer agrees to pay into your SIPP, there’s no limit apart from the £60,000 tax relief cap. Moreover, your annual income does not limit their contributions.

Salary sacrifice is a popular method available with some employers. It means employees accept a reduced salary in exchange for a pension contribution. This benefits both parties through reduced national insurance contributions and tax relief.

Contributions made are pre-tax, allowing you to get maximum tax relief benefits. Your employer should be able to supply you with complete details of how salary sacrifice works.

How much can I pay into a SIPP each year?

There is usually no minimum SIPP contribution unless required by your SIPP provider. The maximum annual contribution allowance is £60,000, which includes all contributions and tax relief.

Otherwise, you will face tax charges if you exceed the limits on SIPP contributions, currently £60,000 per year, so careful planning is essential.

High earners SIPP contributions

The government introduced the tapered annual allowance in April 2016, which places additional limits on SIPP contributions for high earners. It is a UK pension rule that reduces the amount of pension contributions high earners can make each year and receive tax relief.

Those with annual income over £200,000 may be subject to a tapered annual allowance. Your pension allowance will reduce by £1 for every £2 of adjusted income exceeding £260,000.

If your adjusted income is £280,000, the tapered annual allowance would reduce your allowance by £10,000. This is the calculation - £280,000 - £260,000 = £20,000, and £20,000 / £2 = £10,000. Additionally, there are many online calculators available to help with more specific calculations.

The greatest reduction to the annual allowance is £50,000, as shown in the table below. So, if you earn £360,000 or more, your annual allowance may be reduced to just £10,000.

 

Adjusted Annual Income	Contributions Annual Allowance
£260,000	£60,000
£280,000	£50,000
£300,000	£40,000
£320,000	£30,000
£340,000	£20,000
£360,000+	£10,000 (minimum)

 

Can you carry forward any SIPP allowance?

While there are limits on SIPP contributions, it is possible to contribute more than the standard annual allowance by using the carry forward rule.

This option is for those who have not used their full allowance for any of the previous three tax years, and have already used up their current year’s allowance. You must have been a member of a pension scheme for the previous tax years in question.

You should consult with a financial advisor if you are considering carrying forward unused allowances. They can explain how to maximise the benefits of the carry forward rule and how it all works.

If you have already started drawing income from your SIPP, it’s really important to get expert financial advice. 

Will taking an income from your SIPP affect your annual allowance?

If you start taking taxable income from your SIPP, this will trigger the Money Purchase Annual Allowance (MPAA).

The MPAA reduces your maximum annual allowance to £10,000, one of the strictest limits on SIPP contributions, meaning a maximum contribution of £8,000 and tax relief of £2,000.

You do not trigger the MPAA if you take out some, or all of your 25% tax-free lump sum allowance. Again, it’s best to seek financial advice before doing this.

It's even more important if you plan on continuing to contribute to your pensions. 

Get expert advice

For many, SIPPs serve as a valuable and important part of retirement planning. They offer a flexible and tax-efficient way to grow their pension funds.

However, it is vital to understand the rules, especially the limits on SIPP contributions, and careful planning is required to maximise the full benefits.

SIPPs are extremely flexible, giving you greater control over investments whilst offering significant tax benefits. However, making the most of an SIPP requires a more hands-on role and active management.

Unless you have experience in investing, it would be a good idea to use an FCA-Regulated financial advisor. They can suggest suitable SIPP investments and help you manage your investments.

An expert financial advisor can tailor a SIPP to suit you and your future retirement needs. They can help you to maximise the benefits of your SIPP to ensure a comfortable retirement.

Let Regulated Advice match you with a financial advisor for expert advice.