What is a SIPP? Tax relief, allowance and how it works

What is a SIPP pension?

SIPP stands for self-invested personal pension. Like other personal pensions, a SIPP is a tax-efficient wrapper for your retirement savings. The key difference is the investment flexibility it offers: rather than being limited to a small range of funds chosen by an insurer, a SIPP gives you access to a much broader universe of assets, including shares, bonds, investment trusts, commercial property, and funds such as ETFs.

According to MoneyHelper any UK resident aged 18 to 74 can open a SIPP. You can also open one on behalf of a child. Contributions are allowed up to age 75, after which new contributions are no longer eligible for tax relief.

*Source: HMRC

How does a SIPP work?

A SIPP works in the same way as other defined contribution pensions, with the added advantage of a wider investment choice. Here is the basic process:

1. You open a SIPP with a provider and make contributions, either as a regular payment or a lump sum.

2. Your provider claims basic-rate tax relief of 20% from HMRC and adds it to your pot (remember this will differ depending on which tax bracket you’re in). This typically takes six to eleven weeks to arrive.

3. You choose how to invest your pension pot from the options available on your provider's platform, which may include shares, ETFs, funds, bonds and cash.

4. Your investments grow free from UK income tax and capital gains tax within the SIPP wrapper.

5. From age 55 (rising to 57 from April 2028), you can begin drawing from your SIPP, with this income subject to tax. You can usually take up to 25% as a tax-free lump sum, with the remainder taxed as income.

A SIPP can be well suited to investors who want access to a broad range of assets. For example, many SIPP holders invest in ETFs as part of a diversified portfolio. Our guides to the best UK ETFs and the best global ETFs can help you explore some of the options available. It’s also important to be aware of what an ETP is.

SIPP: key facts for 2026/27

£60,000 Annual allowance or 100% of earnings, whichever is lower (House of Commons Library)

Up to 45%  Maximum tax relief on contributions (HMRC)

25% Tax-free lump sum on retirement up to £268,275 (HMRC)

How does SIPP tax relief work?

 Tax relief is one of the most compelling reasons to invest in a SIPP. When you contribute, the government effectively tops up your payment based on your income tax rate. The following relief rates apply for 2026/27:

Basic-rate relief is added automatically by your SIPP provider, who claims it from HMRC on your behalf. Higher and additional-rate taxpayers need to claim the extra relief through their Self Assessment tax return. Note that the additional relief reduces your tax bill rather than being added directly to your pension pot, and it can also be used to reduce student loan repayments, if applicable.

Source: interactive investor

SIPP annual allowance for 2026/27

The annual allowance is the maximum you and your employer can contribute to your pensions in a single tax year before a tax charge applies. For 2026/27, HMRC confirms the standard annual allowance is £60,000, or 100% of your UK earnings, whichever is lower. This total covers contributions from all sources, including your own payments, employer contributions and any tax relief received.

There are some important variations to be aware of:

• Tapered allowance: if your adjusted income exceeds £260,000, your allowance is reduced by £1 for every £2 of income above that threshold.
• Money Purchase Annual Allowance (MPAA): once you start drawing taxable income from a SIPP, your allowance for future contributions drops to £10,000.
• Carry forward: if you have not used your full allowance in the previous three tax years, you can carry unused amounts forward and contribute more than £60,000 in a single year.
• Non-earners: if you have no earnings, you can still contribute up to £2,880 per year and receive tax relief, bringing the total to £3,600.

When can you access a SIPP?

Under current rules (which can change), you can begin drawing from a SIPP from age 55. However, the government has legislated for this to rise to 57 from 6 April 2028. Some savers may retain a protected pension age allowing access at 55 if their scheme rules allowed this before November 2021, but this should be confirmed with your individual provider. For these reasons, many investors prefer to invest in both an ISA and SIPP, helping to reduce the uncertainty surrounding changing legislation.

When you do access your SIPP, you have several options:

• Tax-free lump sum: you can usually take up to 25% of your pension pot tax-free, capped at £268,275 across all your pensions. The remainder is taxed as income at your marginal rate.
• Flexi-access drawdown: keep your pot invested while drawing an income, with flexibility over how much you take and when.
• Annuity: use some or all of your pot to purchase a guaranteed income for life.
• Lump sum withdrawals (UFPLS): take uncrystallised fund pension lump sums, where 25% of each withdrawal is tax-free and 75% is taxed as income.

SIPP vs ISA: key differences

Both a SIPP and a stocks and shares ISA allow your investments to grow free from UK income tax and capital gains tax. The main differences lie in how they are taxed on the way in and out, and how accessible your money is. The two biggest differences are the access rules and the tax treatment:

In short, a SIPP can offer greater tax relief on contributions and tends to be better suited to long-term retirement saving, while an ISA can offer more flexibility and immediate access. Many investors use both in combination.

Advantages and risks of a SIPP

SIPP FAQs