What Are the Main Tax Benefits of Investing in a SIPP?

If you keep up to date with financial developments in the UK, you will know that aspiring savers face a significant challenge in 2017.

After all, while high-street banks and building societies have sought to reduce base savings rates in order to prepare for the potential cost of Brexit, inflation has continued to rise at a disproportionate rate to earnings. In fact, inflation held firm at 2.6% during July, and there is no sign that this will decline any time soon.

With few traditional savings accounts matching this rate (unless you want to lock your money away for a significant number of years, of course), you may want to consider investing in a self-invested personal pension plan (SIPP). Although this is considered to be a long-term investment vehicle, this offers a number of tax benefits to customers, and in this article we will take a closer and more detailed look at these.

A Brief Guide to SIPP Tax Benefits

In some respects, there are similarities between SIPPs and standard pension plans. The capital within your fund can grow free from the burden of income and capital gains tax, for example, making it possible to retain more of your savings. Additionally, the amount of tax relief that you benefit from is restricted by your annual earnings and the pension allowance, and this will also have a direct influence on your fund’s bottom line.

The application of tax relief to your SIPP contributions represents a huge benefit, of course, as any money that you invest into your fund will receive a generous 20% top-up from the tax-man. This is a standard rate applied to all savers, and even those who contribute £10,000 to their SIPP can expect to receive an additional £2,500 from the government. If your earnings are subject to the basic 20% tax rate at the time of the deposit, you can benefit from total tax relief of £2,500 and significantly boost your fund.

As this web page from Bestinvest shows, those whose earnings are subjected to higher rates will benefit even more by committing their money to a SIPP. By making the same total contribution of £12,500 (including the £2,500 subsidy from the government), a high-earning individual who pays tax at 40% can claim a further 20% back in relief. This creates a total tax relief figure of £5,000, which is particularly generous in the current climate and capable of boosting your income considerably.

Those whose earnings are subjected to the 45% tax rate will obviously be able to claim back incrementally more, benefiting from total tax relief of £5,625.

The Bottom Line

Incredibly, even children and individuals who don’t pay tax can also make pension contributions and benefit from tax relief. This is great news when saving in the name of children, with contributions of up to £2,880 a year eligible for the basic tax relief rate that can create a total sum of £3,600 per year.

As you can see, a SIPP combines traditional pension tax benefits with a more robust rate of tax relief depending on your initial earnings and current repayment status. This can make a huge difference in the current financial and economic climate, particularly if you are looking to optimise your savings over a prolonged period of time.