We all worry about the future and how our finances might look when we retire, and choosing the right investments for this is a must for you if you want to be able to live comfortably when you finish working. Paying into a self-invested personal pension though, or SIPP, can feel a little complicated, especially when it comes to how much you’re allowed to contribute and when.
In this article we’ll explain everything you need to know about SIPP contributions, from how much your employer can pay in, to your annual allowance, so you can focus on enjoying the now, knowing your future is taken care of.
How much can you pay into a SIPP each year?
Technically you can pay as much into a SIPP as you like every year, but there is a cap on how much you can contribute and still be eligible for tax relief and an annual allowance charge to factor in too. This is called your SIPP annual allowance and it’s calculated based on your income. Contributions over your SIPP annual allowance are not tax efficient and are subject to charges, so it pays to be aware of your limits.
What are the rules for maximum contributions?
Based on the current SIPP annual allowance you can contribute a maximum of 100% of your income OR up to £40,000 (the gross figure), whichever is lowest. For example, if you earn £30,000, your allowance would be £30,000, capped by your income. If you earn £60,000, it would be £40,000, capped by the maximum allowance.
If you earn over £200,000 a year (£240,000 in ‘adjusted’ income), then your allowance is reduced by £1 for every £2 over £240,000 you earn, until it gets to £4,000. This is called the tapered annual allowance.
For example: If adjusted income was calculated to be £300,000, then your annual allowance would be reduced accordingly to £10,000.
Your pensions advisor can help you work out your adjusted income and how the tapered allowance impacts your contributions.
Does the limit apply to other pension pots too?
Yes. These limits apply across all your pension pots combined and include all contributions to them, including those from employers or other third parties. Your SIPP allowance also includes tax relief, so the amount you contribute personally needs to be lower to allow for this. For example, if you are a basic rate taxpayer and you pay in £32,000, you will receive tax relief of £8,000, (20% of the total contribution), taking you up to the £40,000 limit.
You should also keep in mind that there is a lifetime allowance for pensions, which at the time of writing (October 2022) is £1,073,100, frozen until the 2025/26 tax year. This figure is the value of your pension at any given point, not the amount that has been paid into it, so it’s important to be aware of the projected future value.
For example if you pay in £500,000 over the course of your working life but the value of your pension pot when you start to draw down from it is £1,100,000, then you will be over the allowance and subject to lifetime allowance charges. A good pensions advisor can help you to stay within these limits.
How much can your employer contribute?
There are no specific limits on how much your employer can pay into your SIPP, but all contributions will need to be added up and count towards your overall allowance, so personal, employer contributions and tax relief should not total more than £40,000 altogether in any year.
Can you backdate SIPP contributions?
Although you can’t backdate SIPP contributions as such, you can use the pension carry forward rule to take advantage of any unused allowances in the previous three tax years.
For example, if you paid £25,000 into your SIPP each year for the last three years, you would have £15,000 of unused allowance per year that you could carry forward, as long as you aren’t subject to tapering. Adding this to your current years’ allowance of £40,000 means you could potentially contribute up to £85,000. However, you would need to be earning at least £85,000 in that year to do so.
In order to be able to use pension carry forward you need to have used up your allowance in the current year, have underused your allowance in at least one of the last three years, and have been a member of your scheme from the year you want to carry forward. Any increased contributions you make in the current year are based on your income in that year, not the previous years.
What happens if you overpay?
If you go over the annual allowance in any given tax year, you won’t get tax relief on anything you’ve contributed over the limit. You will also have to pay an annual allowance charge. Anything over the cap will be added to your taxable income for the year, and you’ll have to pay tax on it at your usual rate.
Can you pay into a SIPP if you’re not working?
Although generally the SIPP annual allowance is up to 100% of your income, there are special rules in place that allow you to make some form of contributions even when you’re not working or are on a very low income. If you have no income at all or earn less than £3,600, you can still contribute up to £3,600 – £2,880 in personal contributions and £720 tax relief.
Can you pay into a SIPP after retirement?
Yes, you can continue to pay into a SIPP after you retire and start to draw a pension from it, but your annual allowance will be replaced with a Money Purchase Annual Allowance (MPAA) if you hit any of the specific ‘trigger events’. This includes taking your whole pension pot in a lump sum or setting up a drawdown scheme to take income from your pension. If you’re subject small pot rules, speaking to a pensions advisor to find out what your options are.
The MPAA is only £4,000 – £3,200 of personal contributions and £800 tax relief – but if you are keen to continue paying in more than this then there are ways to take money out of your pension without triggering it. They can be complex, but your pensions advisor can help you here.
Speak to a pensions advisor who specialises in SIPPs
Working out how to make your SIPP contributions as tax efficient as possible can be complicated, so it’s always a good idea to get advice from a pensions advisor who specialises in SIPPs. Let us match you with one of the independent advisors we work with and they can carry out a pensions review for you, completely free of charge and with no obligation. They’ll look at your current position, calculate some projections and advise you on the best next steps to help you make the most of your retirement.
Give us a call now on 0808 189 0463 or make a quick online enquiry and we’ll find the right independent pensions advisor for you.
