Pensions in general, and Sipps in particular, offer some of the
best planning and tax reduction opportunities available.
Income tax
Tax relief is available on your own
contributions to your Sipp at the highest tax rate you pay; e.g. if
you are a higher rate tax payer you will receive £40 tax relief for
every £100 you contribute; if you are a lower rate tax payer you
will receive £22 for every £100 invested.
As with other pensions, you can take up to
25 per cent of your Sipp fund as a tax-free lump when you come take
your pension , while any income you take from the remaining fund,
whether via an annuity or income drawdown, is taxable at the
marginal rate you are liable to in retirement.
Your Sipp fund will grow free of income tax
(except for a small amount of tax on UK share dividends).
Capital gains tax
No CGT is payable on any gains made within
your Sipp.
Corporation tax
For employers contributing to a Sipp on
behalf of an employee, there is corporation tax relief. If the
employee is doing ‘salary sacrifice,’ both employer and employee
benefit from a reduction in National Insurance contributions. (NB
salary sacrifice must be properly documented and individuals should
be aware of its possible impact on state benefits, such as the
second state pension (S2P).
Inheritance tax (IHT)
If die before age 75 and before taking your
pension, the fund can pass to your estate free of IHT. If you die
before age 75, but have started drawing on your Sipp, the fund can
pass to your estate free of IHT, but with a 35 per cent tax charge
instead.
If you die after age 75, while taking Alternatively Secured
Pension, your fund will be liable to IHT, unless you leave it to a
charity of your choice, or to your legally wedded spouse,
registered civil partner or a financial dependant (such as a child)
in the form of pension income (not as a lump sum).