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Self-Invested Personal Pension (SIPP)
Tax Implications

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In the UK, a company director can make tax-deductible contributions to a Self-Invested Personal Pension (SIPP) via their limited company. These contributions are treated as an allowable business expense, reducing the company's Corporation Tax bill.

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Here's how it works, based on your salary of £12,570 per annum:

Maximum Contribution Limit

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The annual allowance for pension contributions in the UK for tax relief purposes is currently £60,000 per tax year. This applies to total contributions from all sources, including employer (company) and personal contributions.

Employer Contributions

 

The annual allowance for pension contributions in the UK for tax relief purposes is currently £60,000 per tax year. This applies to total contributions from all sources, including employer (company) and personal contributions.

Employer Contributions

Contributions made directly by your limited company to your SIPP are typically deductible for Corporation Tax purposes if they meet the "wholly and exclusively for the purposes of trade" rule, which HMRC expects to be reasonable given your role and income level. Generally:

  • For a director with minimal salary (£12,570), a substantial pension contribution is likely to be permissible, provided it aligns with company profits and business circumstances.

  • There’s no upper limit on employer contributions, but they must be justified as reasonable business expenses.

In summary:

  1. Maximum SIPP Contribution via the Company: Up to £60,000 per tax year, provided your company profits can support it and HMRC considers it reasonable.

  2. Corporation Tax Relief: Contributions will reduce your company’s taxable profit, lowering the Corporation Tax bill by up to 25% of the contribution amount if your company profits exceed £250,000.

It's best to consult with an accountant to ensure that the contribution amount meets HMRC’s requirements for deductibility and aligns with your company’s financial position.

HMRC requires that employer pension contributions be paid directly to the SIPP provider, not into the director’s personal pension account. The contribution, once made to the SIPP provider, is then allocated to the director’s pension fund.

If a direct personal contribution were made from the director’s account, it would not qualify for corporation tax relief and would instead count as a personal contribution.

In the UK, pension contributions to a Self-Invested Personal Pension (SIPP) by a limited company are generally only tax-deductible on a "paid basis", meaning they are deductible in the tax period when the actual payment is made. Unlike some other expenses, these contributions cannot typically be accrued in advance to reduce taxable profit for an earlier period. For tax purposes, HMRC requires pension contributions to be deducted in the year they are physically paid rather than when they are accounted for.

This approach ensures the contribution aligns with the tax period in which the cash flow occurred, thus maintaining compliance with the HMRC guidelines on business expenses.

Further details are in HMRC’s Business Income Manual and Pension Tax Manual, which outline these requirements in detail and clarify eligibility criteria for corporate pension contributions as allowable deductions. You can explore these in HMRC's guidance 
 

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46030

 

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm041000

Tax implications of  your SIPP at retirement

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When you start drawing from your Self-Invested Personal Pension (SIPP) in retirement, it can have different tax implications depending on how you withdraw the funds and your total income level. Here’s an overview of the main tax considerations:

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1. Tax-Free Lump Sum

  • 25% Tax-Free: Typically, you can withdraw up to 25% of your SIPP as a tax-free lump sum. This can be taken as a single payment or in smaller portions.

  • Balance Taxed as Income: Any remaining funds taken from the SIPP are treated as taxable income and subject to Income Tax at your marginal rate, depending on your income bracket for that tax year.
     

2. Options for Withdrawing Funds

  • Flexi-Access Drawdown: You can keep the remaining funds invested and withdraw amounts as needed, which are taxed as income. The advantage is flexibility, but you may risk depleting your funds if not managed carefully.

  • Annuity Purchase: You can use your SIPP to buy an annuity, providing a regular income for life. This income is also subject to Income Tax based on your tax bracket.

  • Uncrystallised Funds Pension Lump Sum (UFPLS): Allows you to withdraw lump sums without fully “crystallizing” the pension (without committing it to a drawdown plan or annuity). Each withdrawal is 25% tax-free, with the remainder taxed as income.
     

3. Income Tax on Withdrawals

  • Withdrawals are added to any other income, like the State Pension or other pensions, which may push you into a higher tax bracket. For instance:

    • Personal Allowance (0%): Up to £12,570 in total income is tax-free.

    • Basic Rate (20%): Income between £12,571 and £50,270.

    • Higher Rate (40%): Income between £50,271 and £125,140.

    • Additional Rate (45%): Income over £125,140.
       

4. Lifetime Allowance and Tax Charges

  • Although the lifetime allowance charge was removed in April 2023, a cap on the total tax-free lump sum allowed remains at £268,275 (25% of the former lifetime allowance). Withdrawals above this limit could be subject to additional tax rates.
     

5. Inheritance Tax (IHT) and Passing on Your SIPP

  • Under Age 75: If you pass away before age 75, the SIPP can usually be passed on tax-free to beneficiaries.

  • Over Age 75: If you pass away after 75, withdrawals by beneficiaries are taxed at their income tax rate.
     

Please speak to us for tax advice specific to your individual circumstances and we can provide a fee quote to provide advice on this. 

If you withdraw £40,000 in a tax year (after the tax-free lump sum) and it brings your total income above £50,270, part of it could fall into the higher tax bracket, making part of the withdrawal subject to 40% tax. We can advise on the tax implications to your specific

Guide to Setting Up a SIPP

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A Self-Invested Personal Pension (SIPP) allows you to manage your own retirement investments within a tax-efficient pension wrapper. Here’s how to set one up and find a provider that fits your needs:

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1. Understand SIPPs and Their Benefits

  • A SIPP lets you choose and manage your investments from a wide range of assets, such as stocks, bonds, mutual funds, and commercial property.

  • The tax benefits include no capital gains tax on investment growth and tax relief on contributions (up to certain limits).
     

2. Choose Your SIPP Provider

  • Consider Fees: Different providers have varying fee structures, often based on a combination of platform fees, fund fees, and transaction fees. Check if the provider charges a flat fee or a percentage of assets, depending on what would be most cost-effective for your investment size.

  • Investment Options: Choose a provider that offers access to the types of investments you’re interested in (e.g., shares, ETFs, funds, property).
     

3. Opening Your SIPP Account

  • Most providers allow you to open a SIPP online, requiring ID verification and some personal information.

  • You can usually choose between a lump sum or regular monthly contributions, and many providers allow you to transfer in pensions from other schemes.
     

4. Selecting Investments

  • Use the provider's platform to pick investments. Many providers offer tools, research, and resources to help you make informed decisions.

Popular SIPP Providers

1. AJ Bell Youinvest– A low-cost platform with a broad range of investment options, ideal for beginners and experienced investors alike.

2. Hargreaves Lansdown– Known for its extensive investment choices, excellent customer service, and research tools. It has a percentage-based fee model.

3. Interactive Investor– Charges a flat monthly fee, which may suit larger portfolios, and offers a wide range of investments and research tools.

4. Vanguard Investor– Known for its low-cost funds and simple platform, although its investment range is more limited to Vanguard products.

5. Fidelity Personal Investing– Offers a good selection of funds and shares with a competitive fee structure, particularly for larger portfolios.

5. Managing Your SIPP

  • Regularly review your investments and make adjustments as needed based on your financial goals, risk tolerance, and time to retirement.

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This guide offers an overview, but clients should consult with a financial advisor if they need tailored advice for their circumstances. We are not qualified financial advisors and we can not advise on which investment to pick within a SIPP. We can only advise on the tax implications in England. 

Maximum Contribution Limit
Tax implications of  your SIPP at retirement
Guide to Setting Up a SIPP
Employer Contributions
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