One of the benefits of holding a pension product is that you can reclaim tax relief on your contributions, provided you meet certain criteria set by HMRC. There are a few rules and variations that you need to be aware of so we have created a quick guide to help.
Tax relief on your annual contributions
If you are a UK tax payer, we will reclaim basic rate tax relief on contributions paid by you of up to £3,600 or 100% of your relevant earnings (whichever is higher). This means if you were to contribute £800, we will reclaim £200 so the total amount you contribute to your SIPP will be £1,000.
If you are a higher rate tax payer, you can reclaim the additional tax relief via your tax return or by contacting HMRC.
Please note that if you contribute more than the annual allowance (or money purchase annual allowance The Money Purchase Annual Allowance (MPAA) for the 2020/21 tax year is £4,000. If you contribute more than the MPAA, then you will be subject to an annual allowance tax charge that effectively cancels out the tax relief received on the amount above the MPAA.), you will be subject to a personal tax charge that will effectively cancel out the tax relief.
If your contributions will be made by a third party, we will still reclaim basic rate tax relief where applicable. Please note: Contributions made by an employer are treated as ‘gross’ contributions therefore we will not be able to reclaim tax relief on them.
You can read our guide to making a contribution, or we recommend that you talk to a regulated financial adviser. If you do not have a financial adviser, you can find one in your area using Unbiased.co.uk.
Levels of tax relief for the 2022/23 tax year
Basic rate tax relief is 20%. If you are a Scottish resident (as determined by HMRC) your tax rate may differ. The current starter rate for Scottish taxpayers is 19% - however for the 2022/23 tax year, we will still be able to claim 20% tax relief where applicable.
The Welsh government also has the power to amend the rate of income tax paid by Welsh residents, and if they do, this may impact the amount of tax we can reclaim on contributions made by Welsh residents. The Welsh government has indicated that they will not amend the rate of income tax for the 2022/23 tax year.
If you pay a higher rate of tax in the UK (including Wales or Scotland), you will need to claim the difference between the basic rate and the higher rate of tax that you pay, via your tax return or by contacting HMRC.
What is the annual allowance and how does it work?
The annual allowance limits the tax privileges applicable to your contributions in a tax year. If you exceed the annual allowance, you will be subject to an annual allowance tax charge which effectively cancels out the tax relief received on the excess amount.
In the 2022/23 tax year, the annual allowance is £40,000. The £40,000 limit includes contributions made by you, your employer and any third parties.
If you have a defined benefits pension scheme (where the pension benefits at retirement depend on your earnings history and your length of service with a particular employer), the annual value of any increase in your benefits will also count towards the annual allowance.
If you have adjusted income (that is your total income before the deduction of personal allowances or reliefs) of more than £240,000 per annum, your annual allowance will be reduced by £1 for every £2 of income above £240,000, with a maximum reduction of £36,000.
For further details please refer to the Modular iPlan Technical Guide
This information is based on our interpretation of current law, pensions and tax legislation and HMRC practice, which could change in the future. In addition, your individual circumstances will impact the tax treatment of each of our SIPP products and may also be subject to change in the future. This may affect the value of your investments and pension benefits you receive.