SIPPs offer you tax benefits in the same way as personal pensions do. This relief is designed to increase a pension pot and acts as an incentive. The government allows pensions to benefit from a level of tax relief that varies depending on your earnings.
When it comes to SIPPs, the government will add 20 pence for every 80 pence you enter into a SIPP. Your provider claims this tax relief on your behalf which is then added to your account. Even better news is the fact that just about everyone who is a UK resident and under the age of 75 is eligible. It does not matter if you are under 18 or unemployed. Those who earn enough money to be included in the higher rate of tax (40%) can claim up to another 20 pence for every £1 gross they contribute from either the nearest tax office or during the filling in of a tax return.
Essentially, a SIPP worth £15,000 would only cost you £12,000 if you fall under the basic rate taxpayer bracket. Higher earners may only have to pay £9,000. The highest tax rate is 50% and it is possible for these taxpayers to claim a further 10 pence per £1 gross contribution. This means a £15,000 SIPP may only cost those on the high rate of tax £7,500. It should be noted however that there are restrictions on higher earners.
Investments made outside the SIPP banner are subject to capital gains and income taxes. Investing in funds under the guise of a SIPP however means that the profits earned escape such charges. When you combine this with the tax relief, it is easy to see why SIPPs are such a popular option. It should be noted that you cannot claim a refund on any taxes already paid on dividends.
Although all contributions paid by an employer count as gross, it can be put against the taxable profits of the company if it is deemed to be a valid business expense. Employer contributions should also be free from National Insurance and tax.
When your retirement day comes, it is possible to withdraw up to one quarter of your fund tax-free. The remaining money must remain where it is counted as taxable income. In the event that you die before utilising your retirement benefits, it can be used as a form of taxable income for one of your dependants. There is also the option of leaving it to a selected beneficiary as a one-off payment which would be free of tax.
Remember, the amount of tax relief you are entitled to depends entirely on your individual circumstances. Due to the global recession, the UK is suffering financially and the new Conservative government are likely to effect changes to the above rules in the very near future in a bid to curb spending. Therefore, it would be wise not to procrastinate when deciding on a suitable SIPP as the tax situation is subject to change.