Why Sunderland residents should max out their SIPP allowance
SIPP — or Self-Invested Personal Pension — is an excellent way to save for retirement if you are a knowledgeable investor, a higher earner, or if you are self-employed and don't have access to a workplace pension.
For most people, the annual pension allowance is now £60,000 or 100% of their salary, whichever is the lower amount. This is the most you can contribute to your pension pots in a single tax year (from 6 April to 5 April the following year) before you have to pay tax.
When considering a private pension, it's important to remember that your annual allowance is split across all of your pots and includes the money added by your employer, if applicable, and any government tax relief, if you opt in to receive it.
That government tax relief top-up means any extra 20% is added to any amount you personally contribute, and even more can be claimed back if you’re a higher or additional rate taxpayer.
Maximising your annual pension allowance enables SIPP holders to contribute significantly more towards their pension pots while still benefiting from this government tax relief. This is a powerful way to increase your retirement savings, reduce taxes, and safeguard your financial benefits.
This article will explore the benefits of maximising your SIPP allowance in 2025/26.
As mentioned, private pensions have a combined annual tax-free allowance of £60,000. In general, if you exceed your annual allowance, you lose tax relief on the excess and may be subject to an additional tax charge.
However, there is a way to contribute over the pension allowance without paying tax. Once you have maximised the current tax year's allowance of £60,000 or 100% of your income, it may be possible to carry forward any of your unused allowances from the previous three tax years, if your provider can facilitate this.
As you’d get a 20% bonus added to anything you personally contribute to your private pension if you opt in for the tax relief top-up, the more of your annual allowance you use, the more government tax relief you will receive (up to the allowance limit).
For example, if you contribute £10,000 to your SIPP, you will only receive a bonus of £2,000 from the government. However, if you contribute £48,000 to your SIPP, you will receive a significantly larger government top-up of £12,000.
In addition, high earners get even more tax relief. Higher-rate and additional-rate taxpayers can claim an additional 40% and 45% tax relief, respectively, through their Self Assessment.
Any dividends or interest generated by the investments within your SIPP are not subject to income tax, and you don't need to declare these earnings on your annual tax return. Meanwhile, any profits from selling the investments inside your SIPP (known as capital gains) are exempt from capital gains tax.
Since neither income nor gains are taxed, your investments will compound more efficiently, which significantly boosts your retirement savings.
Significant pension contributions could reduce your adjusted net income, helping you stay below key tax thresholds.
By lowering your taxable income, you retain benefits such as:
Your personal allowance: Every UK tax resident can earn a 'personal allowance' of £12,570 each year before they are subject to pay Income Tax to HMRC. However, the personal allowance decreases by £1 for every £2 that your adjusted net income is over £100,000. This means your personal allowance is £0 if your income is above £125,140, and you will be subject to paying tax on all your income.
Child benefits: Child benefits decrease at a rate of 1% for each £200 earned over £60,000 a year by the higher-income partner. This means that if the adjusted net income of the higher-income partner reaches £80,000 a year, child benefits are fully withdrawn.
In addition, donations made to charities through Gift Aid can also reduce your adjusted net income and ensure you retain the benefits above.
We understand that not everyone can afford to contribute their full pension allowance a year into their SIPP. However, doing so will ensure you get access to your unused allowances, the most tax relief from the government, a significant tax-free growth on your investments, and benefits that are usually tapered by high net incomes.