Tax benefits
How you could turn £6,000 into £10,000
When you contribute to a pension, basic rate tax relief is automatically added to your contribution by the government. For instance, invest £8,000 and the government tops this up by £2,000 to make a total of £10,000.If you're a higher rate taxpayer you can claim any higher rate tax relief you are owed via your tax return - up to a further £2,000 in this example. £10,000 in your SIPP could therefore cost you as little as £6,000. You can do what you like with the higher rate tax you get back. Many clients actually reinvest it in their SIPP and receive another round of tax relief.
Unsure how the tax relief works? Here are a few examples:
| Amount you pay (80%) | Government adds (20%) | Total invested in your SIPP | Higher rate tax payers can claim back a further* | Effective cost for higher rate tax payers as little as* |
|---|---|---|---|---|
| £800 | £200 | £1,000 | £200 | £600 |
| £2,880 | £720 | £3,600 | £720 | £2,160 |
| £8,000 | £2,000 | £10,000 | £2,000 | £6,000 |
| £16,000 | £4,000 | £20,000 | £4,000 | £12,000 |
| £100,000 | £25,000 | £125,000 | £25,000 | £75,000 |
* You must have an income of less than £130,000 but pay sufficient tax at the higher rate to claim the full higher rate tax relief.
Each tax year you can pay as much as you earn into pensions like a SIPP and get tax relief (effectively capped at £245,000 for 2009/10). Even non-taxpayers such as children or pensioners (who are under 75) can still contribute £2,880 to which the government adds £720 making a total investment of £3,600 gross. If your total income has reached £130,000 since April 2007 there are restrictions on claiming higher rate tax relief. Please read our High Earners factsheet for further details.
Further tax benefits: Tax free growth and a 25% tax free lump sum
Once invested in your pension the funds will grow free of UK Capital Gains Tax and Income Tax (tax deducted from dividends cannot be reclaimed).
When you retire 25% of the value of the fund can normally be taken as a tax free lump sum, with the remainder then being used to provide you with a taxable income.
No Inheritance Tax if you die before retiring
If you die before you begin taking the benefits from your pension the funds will normally be passed to your spouse or other elected beneficiary free of Inheritance Tax. Other tax charges may apply depending on the circumstances.
The pension and tax rules are subject to change by the government. Tax reliefs and state benefits referred to are those currently applying. Their value depends on your individual circumstances.
How to apply
Applying for a Vantage SIPP should take you no more than 10 minutes.
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