August 31, 2014

SIPP Tax Benefits

So, you may be at the stage where you are considering a Self Invested Personal Pension (SIPP), and are now looking for that ‘deal clincher’. For some, one of the key draws to opening a SIPP is the tax benefits that it provides.

One of the major SIPP tax benefits is Government contributions. This simply means that anything you pay into your SIPP should be net of basic rate tax. Assuming you pay £800 into your SIPP, the government then contributes £200, so £1,000 is eligible in your SIPP.

But the good news doesn’t stop there, being a higher rate tax payer can also provide increased tax relief via self assessment. Continuing the above example, it is possible to claim £200 more back, which would mean your £1000 SIPP would have just cost £600.

Another key SIPP tax benefit is that as and when your money is invested in a SIPP, it can also grow free of Income Tax as well as Capital Gains Tax.

SIPP Tax Benefits – Key points

  • Government automatically adds basic tax relief rate of 20%.
  • Higher rate tax payers could claim back a further 20% or even 30% tax relief depending on whether you pay a 40% or 50% tax rate.
  • Investments in a SIPP can grow free Income tax as well as UK Capital gains tax.
  • As and when you turn 55, you are eligible to take a 25% lump sum completely tax free.