How SIPP tax relief actually works
When you contribute to a SIPP, HMRC adds tax relief at your marginal rate. The mechanics:
| Basic rate (20%) | Higher rate (40%) | Additional rate (45%) |
|---|---|---|
| You contribute GBP 80 net. | You contribute GBP 80 net. | Same mechanism, you reclaim 25% extra via Self Assessment. |
| HMRC adds GBP 20 (25% top-up = effective 20% tax relief). | HMRC adds basic rate GBP 20 (in SIPP: GBP 100). | Net cost of GBP 100 SIPP: GBP 55. |
| Total in SIPP: GBP 100 gross. | You ALSO claim back another GBP 20 via Self Assessment. | |
| This is automatic; no Self Assessment needed. | Net cost of GBP 100 SIPP contribution: GBP 60. |
Max annual allowance: GBP 60,000 for 2025-26 (rose from GBP 40,000 in 2023).
Must also have at least equal "relevant earnings" (salary, self-employed profit). If you earn GBP 50,000: max SIPP is GBP 50,000 (not GBP 60,000).
High-income taper: adjusted income > GBP 260,000 reduces annual allowance by GBP 1 for every GBP 2 above. Minimum: GBP 10,000/year.
Money purchase annual allowance (MPAA): GBP 10,000/year if you have already accessed pension flexibly (i.e. taken income from a drawdown, NOT just the 25% lump sum).
Note: SIPP contributions plus any workplace pension contributions plus DB pension accrual all count toward the annual allowance combined.
Carry-forward + worked examples
You can carry forward unused annual allowance from the 3 preceding tax years, provided you were a member of a UK registered pension scheme in those years (even if no contribution was made).
Worked example 1 - high earner using carry-forward:
Yasmin, partner at consulting firm, 2025-26 income GBP 250,000.
Prior years pension contributions:
- 2022-23: GBP 20,000 (allowance GBP 40K, carry-forward GBP 20K)
- 2023-24: GBP 40,000 (allowance GBP 60K, carry-forward GBP 20K)
- 2024-25: GBP 30,000 (allowance GBP 60K, carry-forward GBP 30K)
- 2025-26: maximum allowance: GBP 60K + GBP 20K + GBP 20K + GBP 30K = GBP 130,000
Her 2025-26 SIPP contribution: GBP 130,000 ALL with tax relief at 45% additional rate.
- Net cost: GBP 130K * 55% = GBP 71,500
- Tax-free GBP 268,275 lump-sum cap reaches sooner
- Saves GBP 58,500 in 2025-26 income tax
Worked example 2 - tapered allowance for very high earner:
David, founder, 2025-26 adjusted income GBP 400,000.
- Excess above GBP 260K: GBP 140K
- Allowance reduction: GBP 140K / 2 = GBP 70,000 reduction
- Tapered annual allowance: GBP 60K - GBP 70K = limited to GBP 10K minimum
- David can contribute only GBP 10K with tax relief at 45%
- Beyond that, contributions face annual allowance charge at 45%
Worked example 3 - basic rate vs higher rate worker:
Liam, GBP 40,000 salary, contributes GBP 8,000 (gross) into SIPP:
- Net cost: GBP 6,400
- HMRC adds GBP 1,600 (20% basic rate)
- In SIPP: GBP 8,000
- No Self Assessment claim (already at basic rate)
Emma, GBP 80,000 salary, contributes GBP 8,000 (gross)
- Net cost: GBP 6,400 (initial)
- HMRC adds GBP 1,600 (20% basic in SIPP)
- Claims back GBP 1,600 via Self Assessment (extra 20% to reach 40%)
- Total NET cost: GBP 4,800 for GBP 8,000 in SIPP
- Effective 40% tax relief
| Income band | Allowance | Relief rate | Net cost of GBP 100 in SIPP |
|---|---|---|---|
| Basic rate | GBP 60,000 | 20% | GBP 80 |
| Higher rate | GBP 60,000 | 40% | GBP 60 |
| Additional rate | GBP 60,000 (tapered) | 45% | GBP 55 |
| Tapered (over GBP 260K) | GBP 10K-60K reduced | 45% | GBP 55 |
| MPAA triggered | GBP 10,000 only | 20-45% | Per bracket |
Tax-free lump sum and drawdown rules
At age 55 (rising to 57 from April 2028), you can access your SIPP.
Pension Commencement Lump Sum (PCLS): tax-free withdrawal of up to 25% of pension fund.
- Lifetime cap: GBP 268,275 (this is the post-April-2024 cap that replaced the Lifetime Allowance)
- Effectively limits tax-free amount you can take from all pensions combined
| Drawdown: remaining 75% goes into a "flexi-access drawdown" account. You can | Income from drawdown is taxed at your marginal rate |
|---|---|
| Take ad-hoc lump sums (uncrystallised funds pension lump sums - UFPLS) | Personal allowance GBP 12,570 (2025-26) |
| Take regular income | Basic rate 20%: up to GBP 50,270 income |
| Leave invested | Higher rate 40%: up to GBP 125,140 |
| Additional rate 45%: above GBP 125,140 |
MPAA trap: as soon as you withdraw FROM drawdown (not just take the 25% PCLS), your annual allowance for NEW contributions drops to GBP 10,000. Plan carefully if still working.
| Death before 75 | Death at 75+ |
|---|---|
| Spouse/beneficiary inherits SIPP free of tax | Beneficiary inherits SIPP at marginal income tax rate on withdrawal |
| Withdrawals from inherited SIPP also tax-free | Still IHT-efficient vs other assets |
| IHT-efficient way to transfer wealth |
Salary sacrifice vs net pay vs relief at source
There are three methods employers/SIPP providers handle pension contributions:
1. Net pay arrangement (most workplace pensions):
- Contribution deducted BEFORE tax calculation
- You get full tax relief automatically through PAYE
- No Self Assessment needed
- Saves: income tax at marginal rate, NOT NI
- Net pay: full GBP 60K contribution costs GBP 36K to a higher-rate (40%) taxpayer
2. Salary sacrifice (workplace):
- You contractually agree to lower salary in exchange for employer pension contribution
- Saves: income tax AND National Insurance (NI)
- Employer NI saved too (often passed on as bonus to your pension)
- Net cost reduces further (40% IT + 8% NI = 48% off, so GBP 60K contribution costs GBP 31,200)
- Caution: lower salary affects mortgage, life insurance, statutory benefits
3. Relief at source (typical SIPP):
- You contribute net out of post-tax income
- HMRC adds 20% basic rate automatically into SIPP
- Higher/additional rate reclaimed via Self Assessment
- Saves: income tax at marginal rate, NOT NI
- This is how Vanguard, AJ Bell, Hargreaves Lansdown SIPPs work
For higher earners, salary sacrifice within workplace pension > relief at source SIPP, because of the NI savings. Use SIPP only for excess beyond workplace pension max, or if no workplace option exists.
For self-employed: relief at source SIPP is the only option (no salary, no NI savings available).
Common SIPP mistakes
- Not claiming higher-rate relief. Many higher-rate taxpayers receive only the 20% basic rate added by HMRC; the extra 20% (40% total relief) requires Self Assessment claim. Easy refund, often missed.
- Exceeding annual allowance + carry-forward without realizing. Excess triggers Annual Allowance Charge at marginal rate - effectively claws back the tax relief. File Form SA101.
- Forgetting MPAA after drawdown. If you withdraw any income from drawdown (not just 25% lump sum), annual allowance drops to GBP 10K. Stop or reduce contributions accordingly.
- Choosing high-fee SIPP. Hargreaves Lansdown (0.45% platform fee + fund fees) vs Vanguard SIPP (0.15% platform fee + fund fee). Over 30 years, 0.30% extra fee = GBP 100K-plus lost on a GBP 500K pot.
- Buying actively managed funds inside SIPP. 1.0-1.5% expense ratios drag on returns. Use index funds.
- Skipping employer match by going SIPP-only. ALWAYS take employer match first (free money), then top up with SIPP.
- Taking tax-free lump sum without need. If you do not need the cash, leaving it inside SIPP keeps it tax-free for IHT planning (death before 75 = SIPP passes free of tax).
- Not coordinating with State Pension forecast. SIPP + workplace pension + State Pension = retirement income. Plan for all three.
- Forgetting partner can also contribute up to GBP 60K. Married couple can shelter GBP 120K/year combined (with full earnings).
- Putting all SIPP in UK equities. Diversify globally - UK is 4% of world equity market cap. VWRL or HSBC FTSE All-World captures global exposure.
Run the math for your situation
Use our GB calculator to plug in your own numbers.