+ Larger Font | + Smaller FontIf you are a basic rate tax payer or pay zero income tax you will receive a 20% relief from HMRC. Tax relief is normally given on most contributions to your SIPP. For example, if you were to contribute 160GBP into your SIPP, HMRC will add another 40GBP making 200GBP in total. If you are subject to a higher rate of tax (generally those earning above GBP43K, then you might be able to benefit from an additional tax relief through your tax return, sometimes up to an extra 20%.
So if you are earning GBP50K per annum and make a contribution into your SIPP OF GBP8K then HMRC will add another GBP2K making GBP10K in total. Then through your tax return you can claim another GBP2K in tax relief.
You should note that if you make a contribution which takes your taxable earnings below the higher tax rate band then the tax relief will be less than 40%. In essence, you will receive a blended rate which would be between 20% and 40%.
High Earners
The April 2009 UK budget made matters more complicated for earners of GBP150K and above.
As of the 6th April 2011 income tax relief on pension contributions will be restricted for those earning in excess of GBP150K. It will be restricted to 20% when income tax exceeds GBP180K. To simplify, tax relief will be restricted to the same rate as that which applies to the basic rate tax payer.
To negate against a two year rush by high earners to put monies into their pension funds before the 6th April deadline, the UK government also announced some anti-abuse measures.
- If your income in 2009/10 is less than GBP150K a year and has been less than this in the previous two tax years then you will still be able to receive the higher tax relief at a 40% rate.
- Regular pension savings contributions (be they monthly or quarterly) can continue unchanged even if you are earning in excess of GBP150K, and will still receive the higher rate tax relief where applicable.
- It is possible to make what is called a ‘special annual allowance’ of GBP20K gross for the 09/10 and 10/11 tax years and again receive the higher rate of tax relief.
- Those not making regular contributions can instead either pay the ‘special annual allowance’ or invest the average sum of contributions for the past 3 years or GBP30K, whichever is the smaller amount.
Frozen Pension Review Service:
Please take advantage of a free, no obligation review with one of our recommended, independent pension advisers. During which they can discuss some of the various options open to you.
