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Many of us find it hard to stay motivated when it comes to saving money. Luckily, the tax system provides incentives to make it easier.

Two schemes in the UK that encourage us to save by offering relief from tax are self-invested personal pensions (SIPPs) and individual savings accounts (ISAs).

However, the tax relief they offer is given at different times, which can have significant implications. There are different trade-offs too. I explain these in more detail below.

Which ‘tax wrapper’ you choose – or whether you have both – will depend on your savings goals and circumstances, and just how disciplined an investor you want to be.

Tax and spend

A good starting point is to understand the similar ways in which a SIPP and ISA can save you in tax, before moving on to the differences.

In both cases, no tax is due on any of the realised capital gains you might make from the investments you hold within them. You also don’t pay tax on any of the interest or income you might earn.

And you don’t have to disclose these capital gains or income on your annual tax return either, which means no extra paperwork once you’ve opened a SIPP or ISA.

Where the differences lie is in the way your contributions are treated because with a SIPP you get generous tax relief on the way in, whereas with an ISA you don’t.

The flipside is that once you’re able to begin withdrawing money from your SIPP, that money (three-quarters of it to be exact – more on this later) forms part of your overall taxable income1. With an ISA, this is not the case. Since you don’t get tax relief in the first place on your ISA contributions, there’s no tax due when you withdraw money from your ISA.

How tax relief helps your SIPP go further in the long run

The way it works on a SIPP is that your contributions get an automatic top-up from the government made up of the basic-rate tax you would have originally paid on this money. So if want £100 of your gross salary to go into your pension each month, you actually just need to pay in £80 because the government adds the missing £20 – the 20% it took in tax from £100 of your salary.  

And if you are a higher-rate or additional-rate taxpayer it can get even better because you can claim back a further 20% or 25%, respectively, of the tax paid through your annual tax return2. So it’s theoretically possible to pay as little as £55 for every £100 in your SIPP. (Please note, though, that the pension tax allowance is tapered for annual earnings above £240,000, so consider taking tax advice if paying near the maximum limits).

In contrast, payments into an ISA attract no tax relief. For a basic illustration of the difference this can make, consider what would happen if each month you invested £100 in a SIPP and £100 in a stocks and shares ISA, increasing each contribution by 5% a year. For argument’s sake, let’s assume that you are a basic-rate taxpayer and earn an annual 5% return on your investments over the period in review.

The chart below shows how each respective pot would grow.

SIPP or ISA: how your hypothetical savings might grow

Source: Vanguard calculations. Note: Because of the tax relief on a SIPP, your monthly £100 is effectively worth £125.

As you can see, thanks to the tax kickback the £1,200 paid each year into a SIPP is bumped up to £1,500, so that by the time you complete 30 years you have more than £195,000 compared with just over £156,000 in the case of the ISA.

Both are sizeable amounts that demonstrate the benefits of regular saving. But one is 25% bigger.

So on that basis alone, it’s a clear win for the SIPP over the ISA – and an even clearer win if you’re a higher-rate taxpayer, since the potential extra boost to your pension savings is greater.

However, don’t underestimate the tax on the way out. The twist, as mentioned earlier, is when it comes to spending your accumulated savings. This is because you can only take out 25% of your SIPP money and not incur any tax. All further SIPP payments would attract income tax at your normal rate. Whatever you take out from your ISA, in contrast, has no tax consequences.

Flexibility versus discipline

But then ISAs can fulfill a much wider range of investor wants.

ISAs are more versatile than SIPPs because you can use them to save for an array of different life goals other than retirement – from saving for a deposit to buying a house to paying for a wedding, ski chalet, child’s upkeep in higher education, or anything else that takes your fancy.

Whether it’s a cash ISA, for your rainy-day funds, or a stocks and shares ISA, through which you can put money to work in the world’s stock markets, a key plus is the fact you can access the contents at short notice, whenever you want3.

With a SIPP, in contrast, you can’t take any money out until you’re aged at least 55 (rising to 57 in 2028). Your money is locked in. But then, if a better retirement nest egg is what you want, then a SIPP can help instill the necessary discipline to get you there.

So, for example, an ISA can provide a tax-efficient home for your savings when you are young or your income is unpredictable and you need reassurance that the money will be available, if needed. If money becomes less tight and you are paying more tax (making the potential relief more valuable), then future contributions can be directed to a SIPP, leaving the stocks and shares ISA as a fund for more intermediate goals.

There is also no reason why your ISA savings can’t be used to complement your pension savings. It doesn’t have to be an either-or decision.

Ceiling the deal

Another thing to bear in mind is that there are limits to how much you can pay into a SIPP or an ISA. This too can influence the choices you make.

Currently, you can pay as much as your gross annual earnings into a SIPP, up to a maximum £40,000. (You can pay more, but you won’t get the tax saving on the excess.) For an ISA, there is no earnings link but there is a hard annual limit on contributions, which is currently £20,000 (or £9,000 in the case of Junior ISAs).

In addition, SIPPs come with an ability to “carry forward” unused tax relief from the previous three tax years. This means that you can technically contribute up to £160,000 in any year – a feature that is especially handy if you’re self-employed with earnings that fluctuate greatly, since you can make up for years when you were unable to save more.

ISA allowances, on the other hand, come and go each tax year; if you don’t fully use it one particular year then that unused allowance is lost permanently.

Finally, when it comes to spending your pension savings, it is important to remember that there is a lifetime allowance on the overall size of your pension. This covers not just the SIPP that you may hold but all your other pension pots too, including any workplace schemes. Any excess drawn above this amount may be subject to additional tax charges4.The lifetime pension allowance is currently set at £1,073,100 and is frozen at this level until April 2026, suggesting more people could fall foul of it in the coming years unless they plan ahead.

In conclusion, if you are a disciplined long-term investor but need some flexibility, an ISA allows you to easily access your tax-free savings with no lifetime limit. But if you feel you need to build in discipline more than flexibility, then a SIPP may be a better way to go. Having committed to a longer-time horizon, you may also find it easier to take on more risk with your investments to earn a potentially higher return.  

In that respect, your ISA and SIPP can complement each other as part of a long-term savings strategy – it doesn’t have to be one tax wrapper or the other.

Whichever route you choose to go down, your willingness to save early and save often will be key to your investment success – and more so if you follow our investment principles by keeping your investment costs low and having the right balance of investments.




1 Subject to your annual personal allowance, currently set at £12,570.

2 Add 1% to these rates if you are a Scottish taxpayer.

3 Special rules apply to lifetime ISAs, which can only be withdrawn if the saver is buying a home, terminally ill or aged at least 60.

4 Currently 55% for lump-sum withdrawals and 25% for income withdrawals, or 25% on anything over the lifetime allowance if you haven’t taken any of your pension.

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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 either an ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.

If you are not sure of the suitability or appropriateness of any investment, product or service you should consult an authorised financial adviser. Please note this may incur a charge.

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.

If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this article, please contact your financial adviser.

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 article 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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