Pension contributions explained

In this post, we will be explaining the pension contributions you can make to your SIPP. We will also explaining who can pay pension contributions into your SIPP. We’ll be breaking down the key points whilst also simplifying legal definitions. For a more detailed overview, be sure to look at the Key Features Document for your iSIPP.

Who can pay contributions to my SIPP?

Can my employer pay pension contributions into my SIPP?

Who is a relevant UK individual?

You class as a relevant UK individual in a tax year if you:

1. Have relevant UK earnings (see below) chargeable to income tax for that tax year; or
2. Are resident in the UK at some time during that tax year; or
3. Were resident in the UK at some time during the five tax years immediately before the tax year in question and they were also resident in the UK when they joined the pension scheme; or
4. Have for that tax year general earnings from overseas Crown employment subject to UK tax (as defined by section 28 of Chapter 5 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA); or
5. Are the spouse or civil partner of an individual who has for the tax year general earnings from overseas Crown employment subject to UK tax (as defined by section 28 of ITEPA).

What are relevant UK earnings?

Relevant UK earnings are:

1. Employment income such as salary, wages, bonus, overtime, commission chargeable to tax under section 7 (2) Income Tax (Earnings and Pensions) Act 2003 (ITEPA); or
2. Income derived from the carrying on or exercise of a trade profession or vocation (whether individually or as a partner acting personally in a partnership) chargeable under Part 2 Income Tax (Trading & Other Income) Act 2005; or
3. Income arising from patent rights and treated as earned income under section 529 Income and Corporation Taxes Act 1988 (ICTA 1988); or General earnings from overseas Crown employment which are subject to tax in accordance with section 28 of ITEPA.

What is the Annual Allowance for pension contributions?

The Annual Allowance for contributions is the amount you can put into one or more of your pensions schemes and qualify for tax relief. Generally, you can contribute up to 100 per cent of your earnings and receive tax relief on the first £40,000 you contribute in that year (£40,000 being the current Annual Allowance).

What happens if I am a high earner?

A Tapered Annual Allowance will apply to income (including pension contributions) of more than £240,000. Above £40,000, Annual Allowance will be reduced by £1 for every £2 income you have more than the £240,000.00. This is subject to a maximum reduction of £30,000 in the current tax year.

Summary

SIPPs, like other pension products, can be an efficient way to save for your retirement. The tax reliefs associated with your contributions can help to build the value of your pension over time. If you class as a relevant UK individual, you can contribute to your iSIPP. Additionally, other people can contribute to your pension on your behalf. Understanding who can contribute to your iSIPP and how the rules differ depending on your circumstances is important when planning your future finances. For a more detailed overview of the rules for your iSIPP always refer to the Key Features Document where we will be explaining pension contributions in more detail.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.