Investors who earn more than £3,600 a year can contribute up to 100% of their ‘Relevant UK’ earnings into their SIPP in each tax year and receive tax relief at up to their top rate of tax.
However, there is a limit on the total payments that can be made each year (excluding transfer payments).
Previous pension allowances
| Tax year | Annual allowance | Lifetime allowance |
|---|---|---|
| 2017/18 | £40,000 | £1 million |
| 2016/17 | £40,000 | £1 million |
| 2015/16 | £40,000 | £1.25 million |
| 2014/15 | £40,000 | £1.25 million |
Any payments that exceed this annual limit are subject to a penalty tax charge of 40%.
Those who are unemployed or have no taxable income can still contribute up to £3,600 per tax year to a pension and receive basic rate tax relief of 20%. This means that a person who wishes to put £3,600 into their pension scheme only has to contribute £2,880 as the rest is topped up by the government. Contributions can be made by a third party such as a parent, grandparent, civil partner or spouse.
Payments can be made into a SIPP until the age of 75 and holders can decide when they want to start and stop their payments, and whether they want to make regular contributions or lump sum payments. Contributions can also be made by employers.
A company can pay up to the annual limit into an employee’s pension even if they earn less than this subject to demonstrating that the company can afford the payment.
There are special rules regarding the availability of tax relief for high earners,
Lifetime Allowance
As well as an Annual Allowance, it is important to remember that there is a Lifetime Allowance on the total balance of funds in all pension plans held by an individual.
If the total value of a person’s pensions exceeds this allowance at retirement, they will be liable to a penalty tax charge on the excess. If a person is registered for primary or enhanced protection with HM Revenue & Customs before 6 April 2009 then they may have a higher personal allowance or the lifetime allowance may not apply.
Relevant UK earnings
The earnings which pension contributions are based on are known as Relevant UK earnings. For people who are employed, this is the salary they receive from their employer in a tax year including any bonuses, commission or benefits.
For those who are self-employed, Relevant UK earnings are the profit they make in a tax year from their trade, profession or vocation, or from patent rights.