Do You Pay Tax On A SIPP?

A Self-Invested Personal Pension (SIPP) is a type of personal pension that allows you to build up a retirement pot through savings and investments.

Because SIPPs offer a wide range of investment opportunities and tax benefits, you will need to know the tax rules for your individual circumstances to know if you need to pay tax on a SIPP.

You can usually access your SIPP from age 55 (rising to 57 from April 2028) and take a 25% tax free lump sum. You can also access your pension in phases (phased drawdown) and take tax free cash allowing the remainder to potentially grow. You pay no Income Tax or Capital Gains Tax on any money you invest in your SIPP.

Basic rate taxpayers who invest in a SIPP receive a 20% top-up from the government. Higher-rate (40%) and additional-rate (45%) taxpayers can claim back an extra 20% or 25% respectively through their Self Assessment tax return.

The regulations governing SIPPs are clear but the decisions you make about your life and retirement will have a big impact on how much tax you pay, read on to find out more.

How Does SIPP Tax Relief Work?

Tax relief on your SIPP means the government effectively refunds some of the income tax you’ve paid by adding it to your pension contributions.

You can contribute up to 100% of your earnings to your SIPP (up to the current Annual Allowance of £60,000 gross) and receive 20% pension tax relief on contributions up to that amount. Tax relief rates on your SIPP in England, Wales and Northern Ireland are different to the rates in Scotland:

Income Tax Relief Rates on your SIPP For England, Wales, and Northern Ireland:

• 20% Basic Rate
• 40% Higher Rate (Over £50,270 pa)
• 45% Additional Rate (Over £125,140 pa)

Income Tax Relief Rates on your SIPP For Scotland:

• 20% Basic Rate
• 21% Intermediate Rate
• 42% Higher Rate
• 45% Advanced Rate
• 48% Top Rate

How Is The Tax Relief Calculated For Sipps?

SIPP tax relief is a government incentive to help you save for retirement. When you contribute to a SIPP, the government adds back the basic rate of income tax you’ve paid on that contribution – effectively increasing your pension pot.

For example, if you contribute £1,000 net, your provider will reclaim £250 from HMRC, making the total £1,250 gross in your SIPP.

When Is Tax Relief Added To A SIPP?

Different SIPP providers will have their own ways of working. The cut-off points for claiming tax back will be different for each one.

Usually, you make your SIPP contribution every month. Then your SIPP provider will reclaim the basic rate of tax back from HMRC and pay it into your account the following month. If you pay a higher rate than the basic rate you will have to claim back the excess yourself via tax self-assessment.

How Much Can You Contribute To Your SIPP?

You can contribute as much as you like into a SIPP. However, the amount that is eligible to benefit from tax relief is limited to the lower of your relevant earnings (e.g. salary or self-employment income) or £60,000 per tax year (the Annual Allowance for the 2025/26 tax year).

What Is The Lifetime Allowance 2025-26?

While the Lifetime Allowance (LTA) was abolished from 6 April 2024, it was replaced by the Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA).

The LSA limits the total amount of tax-free lump sums you can withdraw during your lifetime currently to £268,275. The LSDBA sets a combined limit of £1,073,100 on the total tax-free lump sums paid from your pension, both during your lifetime and to your beneficiaries if you die before age 75.

Any amounts paid above these allowances are subject to income tax at the recipient’s marginal rate.

What Is The Annual Allowance 2025-26?

The Annual Allowance is the maximum amount of money you can put into your SIPP retirement plan each year that benefits from pension tax relief. In 2025-26 it’s £60,000 or 100% of your earnings if lower.

What Is The Tapered Annual Allowance?

The Tapered Annual Allowance is a rule that reduces the amount of tax-relievable pension contributions you can make if you’re a high earner.

For the 2025/26 tax year, your Annual Allowance starts to taper down from the standard £60,000 to a minimum of £10,000 if:

• Your Threshold Income is over £200,000, and
• Your Adjusted Income is over £260,000

The table below shows how the tapered annual allowance works based on the standard annual allowance of £60,000 for this tax year, 2025-26.

How Does The Money Purchase Annual Allowance Work?

The Money Purchase Annual Allowance (MPAA) is triggered if you draw taxable income from your defined contribution pension (for example, via flexible drawdown or taking an uncrystallised funds pension lump sum).

Once triggered, your Annual Allowance for defined contribution pension contributions is reduced from the standard £60,000 to £10,000.

Additionally, you will no longer be able to ‘carry forward’ unused allowances from the previous three tax years.

Can I Carry Forward Any Unused Tax Relief From A SIPP?

If you hit the following criteria, you may be eligible to carry forward your unused Annual Allowance from any of the previous three years if:

• You have used up your full Annual Allowance for the current tax year (which is £60,000 for 2025/26).
• You were a member of a registered pension scheme in each of the previous three tax years you want to carry forward from.
• Your total contributions (employer + personal) in those previous years were less than the Annual Allowance applicable for those years (note: it was £40,000 in recent past years).
• You have relevant UK earnings at least equal to the amount you contribute in the current tax year.

How Does SIPP Withdrawal Work?

SIPPs are part of a flexible retirement income strategy. Generally, you cannot withdraw money from a SIPP before age 55 (rising to 57 from 2028).

Once you start taking withdrawals, any amounts beyond your tax-free lump sum are taxed at your marginal income tax rate, based on your total income in that tax year.

What Are The SIPP’s Tax Benefits?

SIPPs can be very tax efficient if used correctly:

1. Government Tax Relief: When you contribute to a SIPP, the government adds tax relief – usually 20% basic rate tax relief – boosting your pension savings.
2. Additional Relief for Higher Earners: Higher and additional rate taxpayers can claim extra tax relief, bringing their total relief up to 40% or 45% – by submitting a Self-Assessment tax return.
3. Contributions Allowed Until Age 75: You can continue to pay into your SIPP until you reach age 75.
4. Tax-Free Lump Sum: You can normally withdraw up to 25% of your pension fund tax-free as a lump sum from age 55 (rising to 57 in 2028).
5. No Capital Gains Tax: Investments inside your SIPP grow free of Capital Gains Tax.
6. Tax-Efficient Withdrawals: After taking the tax-free lump sum, further withdrawals are taxed as income at your marginal rate, which may be low if your overall income is controlled.

Can I Withdraw My SIPP As A Lump Sum In One Go?

Yes, you can withdraw your entire SIPP fund as a lump sum, but it’s rarely the most tax-efficient choice.

• You can usually take 25% of your SIPP tax-free.

• The remaining 75% is taxed as income at your marginal rate in the tax year you withdraw it.

• Taking a large lump sum in one tax year may push you into a higher tax bracket, resulting in a larger tax bill.

Can I Withdraw My SIPP Over 5 Years?

You can withdraw your SIPP over any timescale you wish or need but there may be tax consequences of taking large sums in a single tax-year.

The table below assumes you receive the full new State Pension of £230.25 per week (2025/26), and that your £250,000 SIPP is withdrawn evenly over 5 years.

Income Summary Table

Tax Breakdown Table

The total received from your pension over 5 years is £213,097 after tax. Income tax represents 14.8% of the £250,000 fund, assuming the personal allowance and basic-rate tax thresholds remain unchanged.

Can I Withdraw My SIPP Over 10 Years?

Yes, you can take money from your SIPP over any timeframe you choose. However, tax will be due on amounts above your personal allowance, and taking large sums in one tax year can push you into higher tax brackets.

The example below assumes you receive the full new State Pension of £230.25 per week (£11,973 per year in 2025/26), and have a SIPP fund of £250,000 that you take over 10 years.

Income Summary Table

Tax Breakdown Table

Total amount received from the pension over 10 years would be approximately £213,694 after tax. Income tax represents about 14.5% of the Pension Fund, assuming personal allowance and basic rate tax remain unchanged.

For comparison, taking your entire SIPP as a lump sum in one tax year could result in a significantly higher tax bill (estimated around £70,788), due to pushing into higher tax bands. Spreading withdrawals over several years reduces the annual tax charge and can save you thousands in tax.

It’s always a good idea to seek expert financial advice to understand what’s best for your individual circumstances.

Are SIPPS Subject To Inheritance Tax?

Currently, pension savings in a SIPP (Self-Invested Personal Pension) are not usually subject to inheritance tax (IHT) because they’re considered outside your estate. However, this is due to change from 6 April 2027.

From that date, most unused pension funds, including SIPPs, will be counted as part of your estate for IHT purposes, whether you die before or after age 75.

This means:

• Your SIPP may be subject to a 40% IHT charge on the portion exceeding your available nil-rate bands (£325,000 standard or up to £500,000 with the residence nil-rate band).
• Funds left to a spouse or civil partner remain exempt from IHT, under existing spousal exemption rules.

If you’ve already taken your 25% tax-free lump sum and haven’t spent it, that money is part of your estate and may also be taxed upon death.

Are SIPPs Subject To Capital Gains Tax?

Deposits into SIPPs as well as any gains are not subject to Capital Gains Tax.

Do You Have To Declare A SIPP On Your Tax Return?

Not always – but sometimes, yes. It depends on your income level and how you’re contributing:

When You Don’t Need to Declare It:

• If you’re a basic-rate taxpayer (20%) and your SIPP provider uses relief at source, they’ll automatically claim 20% tax relief from HMRC on your behalf.
• In this case, you don’t need to include your SIPP on your tax return unless you have other reasons to file one.

When You Do Need to Declare It:

• If you’re a higher-rate (40%) or additional-rate (45%) taxpayer, you’ll need to complete a self-assessment tax return to claim the extra tax relief above the basic 20%.
• You’ll enter your gross SIPP contributions (your payment plus the 20% relief already added by your provider) on the pension contributions section of the return.
• This applies whether you’re employed or self-employed, as long as you’re making personal contributions.

Other Scenarios That May Require Declaration:

• You’ve exceeded your Annual Allowance (£60,000 for most people in 2025/26) and may face a tax charge.
• You’ve triggered the Money Purchase Annual Allowance (MPAA) by accessing your pension flexibly — reducing your allowance to £10,000.
• You’re making carry forward contributions from previous tax years.

Is It Better To Have More Than One SIPP?

The short answer is: it depends on your personal circumstances, but many investors do choose to hold more than one SIPP. You are allowed to open multiple SIPP accounts if you wish, and this can offer greater flexibility in managing different investment strategies or providers.

You can also hold one or more SIPPs alongside other pension products, such as workplace pensions, or other savings like ISAs.

However many accounts you hold, you must keep track of your Annual Allowance, which is currently £60,000 (subject to tapering if your income is above £260,000, or reducing to £10,000 if you’ve started accessing your pension).

The lifetime allowance has been abolished as of April 2024, so there is no longer a £1,073,100 limit on the total value of your pension savings.

In its place, two new limits have been introduced: the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA). The LSA currently restricts the total tax-free lump sums you can take during your lifetime to £268,275.

The LSDBA places a combined limit of £1,073,100 on tax-free lump sums paid out from your pension, covering both withdrawals you make and payments to your beneficiaries if you pass away before age 75. Any amounts exceeding these limits will be taxed as income at the recipient’s marginal rate.

Can Two People Pay Into One SIPP?

It’s not possible to have a joint SIPP between two people, but someone else (for example your partner) can pay into your pension. You’ll automatically get basic rate tax relief at 20% if your pension provider claims it for you (relief at source).

If you’re in a workplace pension that allows other people to contribute, the tax rules and tax treatment may differ. You may need to speak to HMRC to receive tax relief. If in doubt it’s always worth seeking expert pension advice.

How Can I Withdraw Funds From My SIPP In The Most Tax-Efficient Way?

There’s no one-size-fits-all answer to withdrawing from your SIPP. Tax efficiency depends on your personal circumstances, other sources of income, and your retirement plans.

It’s strongly recommended to seek advice to explore the best withdrawal strategy tailored to you, helping you minimise tax and maximise your pension benefits.

Need Some Help?

Joslin Rhodes can help you navigate the complexities of Self-Invested Personal Pensions (SIPPs) by providing expert advice tailored to your individual circumstances.

From understanding tax relief and contribution limits to planning the most tax-efficient ways to access your pension savings, their team guides you through key decisions that impact your retirement income.

Whether you want to optimise your withdrawals, manage multiple SIPPs, or prepare for upcoming changes like inheritance tax rules, Joslin Rhodes offers clear, practical support to help you make informed choices and maximise your pension benefits.

Tap here to get in touch or call our Stockton Planning Rooms on 01642 52 55 11.

Note: Figures quoted in this article are based on tax year 2025/2026 tax year.