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A self-invested personal pension (SIPP) is a type of pension scheme that gives you more control over your pension investments. It’s a pension that you manage yourself and can use to bring together other pensions and, potentially, lower your costs.

You can also claim back income tax on the money you pay in.

However, there are limits to the contributions that are eligible for this tax relief. These limits are known as pension allowances and the rules governing them can be difficult to navigate.

So, with the end of the current tax year approaching, here’s a handy guide.

What does tax relief mean in practice?

There are two types of tax relief that you can receive on your SIPP contributions:

  1. Basic rate tax relief: This is the government returning the 20% income tax you originally paid on the money you used to fund your SIPP contributions. It is usually repaid automatically into your pension account several weeks after your contribution (‘relief at source’). So, for every £80 you pay into your SIPP, for example, you can get £20 in tax relief on top.
  2. Higher-rate tax relief: If you pay higher-rate income tax (40% or 45%), you can claim additional tax relief on your SIPP contributions. You can claim back an extra £20 or £25, respectively, via your annual tax return. So it’s possible to pay as little as £55 into your pension to see a £100 investment.

The illustration below provides a summary of how it works.

Total cost of a £100 pension contribution

Source: HMRC, Vanguard

How much can you pay tax-free into a pension?

Annual allowance

Most people can pay 100% of their gross annual income1 into their pension savings each tax year as long as the amount doesn’t exceed £40,000. (This annual allowance is due to rise to £60,000 on 6 April, following the government’s Spring Budget).

What that means in practice, based on the current allowance, is that basic-rate taxpayers can pay in up to £32,000 of their net income and get a £8,000 top-up back from the government (Higher-rate taxpayers also pay in £32,000 to get up to the £40,000 mark but can get a further £8,000 back through their tax return, so it would effectively cost them just £24,000). 

This is known as the annual allowance and covers all the pensions a person may hold (excluding the state pension) plus any employer or third-party contributions made to them, as well as their own personal contributions.

Exceed the allowance limit and you may be subject to a tax charge based on the excess.

Tapered annual allowance

For very high earners, there comes a point when the annual pension allowance is gradually reduced until it drops to £4,000. This will be increased to £10,000 from 2023-24.

The rules around this tapering are complicated, so if you think you’re likely to be affected it’s probably worth seeking financial advice. The gist of it, though, is that if your ‘threshold income’ rises above £200,000 and your ‘adjusted income’ is above £240,000 in 2022-23, then your pension allowance will be tapered at a rate of £1 for every additional £2 earned2. Tapering will happen if your adjusted income is more than £260,000 for 2023-24.


If you don’t earn an income and as a result don’t pay income tax, you still have an annual pension allowance which comes with automatic tax relief. This totals £3,600 and comprises £2,880 in personal net contributions and £720 in tax that you get back from the government.

Use it or lose it?

No, you don’t use it or lose it. Unused pension allowances from the previous three tax years can be carried forward. Theoretically, that means an individual could potentially earn tax relief on £160,000 in any one year, rising to £180,000 for the 2023/24 tax year – three years of the previous annual allowance at £40,000, and £60,000 for the 2023/24 tax year.

To carry forward pension allowances, though, you need have been an active member of a relevant pension scheme (such as a SIPP) during the period. You also need to use up your full allowance for the current tax year first and have at least earned what you wish to contribute in total.

Lifetime allowance

A lifetime pension allowance of £1,073,100 also applies and had been frozen until 2026, although the government announced big changes in the Spring Budget.

If a person’s total pension savings (including workplace pensions and SIPPs) exceed this limit in the current tax year, they could be taxed up to 55% on the excess, if taken as a lump sum, or 25% as income. However, from 6 April 2023, the charge will be removed and from April 2024, the lifetime allowance will be removed completely.

A lifetime allowance tax check is also undertaken under the current rules if you reach your 75th birthday and have an untouched pension or one in drawdown, or if you die before then and have pensions you haven’t touched.

A pension calculator can help you decide if you risk breaching this lifetime allowance before the lifetime allowance is phased out.

Money purchase annual allowance

If you start taking money from your pension, the amount you can put back into it is sharply reduced. The reduced amount you can put back in is known as the money purchase annual allowance (MPAA).

Leave all the funds untouched, or only take the 25% tax-free lump-sum entitlement, and your annual pension allowance will remain at £40,000.

But start taking a taxable income or an individual lump sum (a mix of tax-free cash and taxable income), and the amount you can save into your pension each year will drop to just £4,000, comprising £3,200 in personal contributions and £800 in tax relief. This will be raised to £10,000 from April.

Regardless of the more generous tax treatment, it’s why you should stop and think before taking cash from your pension pot.


SIPP allowances and tax relief can be a powerful way to boost your pension savings. However, it’s essential to understand the annual allowance, tapered annual allowance, and MPAA when planning for your retirement. While the lifetime allowance is due to be phased out, you should consider whether you are likely to breach the £1,073,100 figure before April 2023.

If you have any questions or are unsure about how SIPP allowances and tax relief work, it's always a good idea to seek advice from a financial adviser.


1 Otherwise known as 'relative earnings' which includes an employee's salary and bonus payments and income from a self-employed trade, profession or vocation, but excludes dividends.

2 For more on working out your 'adjusted' and 'threshold' income, read this government guide.

3 Under certain exceptional circumstances such as ill health, and depending on a pension scheme’s rules, it may be possible to withdraw pension funds earlier. However, early withdrawals may also be classed as unauthorised and liable to a 55% tax charge. 

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Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

The eligibility to invest in an ISA depends on individual circumstances and all tax rules may change in future.

Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.

Any tax reliefs referred to in this article are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.

Important information

This article is designed for use by, and is directed only at, persons resident in the UK. The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

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