SIPP Allowance: Annual Limit, Tax Relief, and Carry Forward

The SIPP allowance for the 2025/2026 tax year is £60,000, which is the most you can pay into all your pension schemes combined and still receive tax relief.¹ A separate cap limits the tax-free cash you can take out across your lifetime to £268,275. Both figures can be reduced in specific circumstances, and both are set to interact with a major inheritance tax change arriving in April 2027.

The £60,000 Annual Allowance

The Annual Allowance is the single number that governs how much can go into your pensions in a tax year (6 April to 5 April) with tax relief attached. For 2025/2026 the standard figure is £60,000.¹ It covers your own contributions, any employer contributions, and the basic-rate tax relief added by HMRC.²

The limit is not per-pension. If you have a SIPP and a workplace scheme, contributions to both count against the same £60,000. Breach it and the excess is taxed at your highest marginal income tax rate through the Annual Allowance charge.

The Earnings Cap on What You Personally Pay In

Alongside the £60,000 ceiling, your personal contributions attracting tax relief are capped at 100% of your relevant UK earnings for the year. Relevant earnings means money from employment or self-employment. Dividends, rental income, and investment returns do not count.³ Someone earning £45,000 from a job can get relief on personal contributions up to £45,000 gross, even though the headline allowance would otherwise allow £60,000. Employer contributions can still take the overall figure higher, up to the £60,000 cap.

If you have no earnings at all, you can still pay in £2,880 net each year and receive basic-rate relief that lifts it to £3,600 gross.³ This is how a working spouse can fund a pension for a non-working partner and still pick up the 20% government top-up.

Carrying Forward Unused Allowance From Earlier Years

If you did not use the full allowance in the three previous tax years, you can bring the unused portion forward to boost the current year’s limit.⁴ Two conditions apply. You must use the full current-year allowance first, and you must have been a member of a registered pension scheme in each year you want to carry forward from. No scheme membership in a given year means no allowance to recover from it.

Carry forward works from oldest year first. Say you want to pay in £100,000 in 2025/2026. The current £60,000 covers the first slice, leaving £40,000. If £20,000 was unused in 2022/2023, £10,000 in 2023/2024, and £15,000 in 2024/2025, you take the £20,000 first, then the £10,000, then £10,000 of the 2024/2025 unused amount. The whole £100,000 lands with tax relief and no charge. Anything older than three years is permanently lost.

You still need relevant earnings in the current year to support personal contributions above £3,600 gross. Carry forward lifts the Annual Allowance ceiling; it does not override the earnings cap.

When the Allowance Drops Below £60,000

Two situations shrink the standard £60,000: accessing a pension flexibly, and earning a high income.

The Money Purchase Annual Allowance

Once you start withdrawing taxable income from a defined contribution pension such as a SIPP, the Money Purchase Annual Allowance (MPAA) permanently reduces your future contribution limit for money purchase pensions to £10,000.⁵ There is no path back to £60,000 after the trigger.

Trigger events include taking income through flexi-access drawdown or withdrawing an uncrystallised funds pension lump sum (UFPLS). Taking only your 25% tax-free cash, without drawing taxable income, does not trigger the MPAA.¹ The distinction catches people out: once a drawdown pot pays out any taxable income, however small, the £10,000 limit applies to money purchase contributions from that point on. Carry forward cannot be used to lift the MPAA figure, though it can still apply to defined benefit accrual under a separate alternative allowance.⁵

The Tapered Annual Allowance

High earners face a second reduction. Two income tests decide whether the taper applies: threshold income above £200,000 and adjusted income above £260,000.⁶ If threshold income is £200,000 or below, the taper never applies regardless of adjusted income.

Threshold income is broadly your total taxable income minus your personal pension contributions. Adjusted income adds employer pension contributions back on. When both tests are failed, the Annual Allowance falls by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000. The floor is hit at an adjusted income of £360,000. An adjusted income of £300,000 produces a reduction of £20,000, leaving a tapered allowance of £40,000.

How Tax Relief Reaches Your Pot

SIPPs typically use the relief-at-source system. You pay in from money that has already been taxed, and your provider claims basic-rate relief (20%) from HMRC and credits it to your pension.³ Pay in £8,000 and the provider adds £2,000, giving you £10,000 gross in the pot. That £10,000 is the figure that counts against your Annual Allowance.

Higher-rate and additional-rate taxpayers get only the basic 20% automatically. The rest has to be claimed through Self Assessment.³ A higher-rate taxpayer paying in £10,000 gross receives £2,000 automatically into the SIPP and can then reclaim a further £2,000 through their tax return. Missing this step is one of the most common and expensive mistakes SIPP holders make.

The income tax bands for England, Wales, and Northern Ireland in 2025/2026 are 20% on taxable income from £12,571 to £50,270, 40% from £50,271 to £125,140, and 45% above £125,140.⁷ Scottish taxpayers use different rates and bands, which changes how much extra relief they can claim back.

The Lifetime Cap on Tax-Free Cash

The old Lifetime Allowance was abolished on 6 April 2024 and replaced by two caps focused on the tax-free parts of your pensions.⁸ There is now no cap on the overall size of your pension, but there is a hard limit on how much comes out tax-free.

The Lump Sum Allowance (LSA) is £268,275. This is the total tax-free cash you can take across all your pensions in your lifetime, covering the tax-free element of your pension commencement lump sum and the tax-free portion of any UFPLS.⁸ Anything taken as tax-free cash above the LSA is taxed at your marginal income tax rate.

The Lump Sum and Death Benefit Allowance (LSDBA) is a broader cap set at £1,073,100 for most people.⁹ It covers everything in the LSA plus any tax-free lump sum death benefits paid to beneficiaries if you die before age 75. Amounts above the LSDBA are taxed at the beneficiary’s marginal rate.

If you drew benefits before 6 April 2024 and used some of the old Lifetime Allowance, both your LSA and LSDBA are reduced through a transitional calculation. Someone who had used 50% of the old allowance would have a remaining LSA of roughly £134,138 and a remaining LSDBA of roughly £536,550. People who hold protections such as Fixed Protection 2016 may be entitled to higher figures than the standard amounts.

If You Live Outside the UK

If you become non-resident, you can usually keep paying into your SIPP with UK tax relief for up to five tax years after the tax year of departure. Beyond the £3,600 gross floor, relief during that window still requires relevant UK earnings.³ After the five years are up, you can continue to hold and manage the SIPP, but new contributions no longer attract UK tax relief. The £2,880 net non-earner contribution remains available throughout the five-year window regardless of UK earnings.

The Inheritance Tax Change Arriving April 2027

Unused SIPP funds are generally outside your estate for inheritance tax under current rules. That ends on 6 April 2027. From that date, most unused pension funds and pension death benefits will be included in the value of your estate for inheritance tax, charged at 40% on amounts above the nil-rate band.¹⁰ For anyone treating a SIPP as part of their estate plan, this changes the maths.

The main features of the change:

The first £325,000 of your total estate (now including pension funds) passes free of inheritance tax, with an additional residence nil-rate band of up to £175,000 potentially available.
Amounts left to a spouse or civil partner remain fully exempt.¹¹
Death-in-service benefits from a registered pension scheme and dependants’ scheme pensions from defined benefit arrangements are excluded.¹⁰
Pension death benefits paid to a qualifying charity remain exempt.

Under the current rules, dying before 75 lets beneficiaries receive SIPP funds entirely tax-free provided they are designated within two years and the LSDBA is not exceeded. Dying after 75 means beneficiaries pay income tax at their own rate on withdrawals but no inheritance tax. From April 2027, inheritance tax will apply on top of any income tax already due, which can push the combined effective tax rate well above 50% in some situations.

The government has said pension scheme administrators will be liable for reporting and paying inheritance tax on unused pension funds from 6 April 2027, with beneficiaries becoming jointly liable 12 months after the death.¹¹ The legislation is expected in Finance Bill 2025-26, and the exact mechanics for pension schemes and personal representatives are still being finalised. If a SIPP forms part of your inheritance planning, taking advice before April 2027 is worthwhile.

1
GOV.UK. Pension Schemes Rates
2
GOV.UK. Tax on Your Private Pension Contributions – Annual Allowance
3
GOV.UK. Tax on Your Private Pension Contributions – Tax Relief
4
GOV.UK. Pensions Tax Manual – PTM055100 Annual Allowance: Carry Forward: General
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GOV.UK. Pensions Tax Manual – Annual Allowance: Money Purchase Annual Allowance: General
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GOV.UK. Work Out Your Reduced Tapered Annual Allowance
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GOV.UK. Income Tax Rates and Personal Allowances
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GOV.UK. Abolition of the Lifetime Allowance
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GOV.UK. Pensions Tax Manual – PTM174200 Transitional Rules for the Tax Year 2024-25: Lump Sum and Death Benefit Allowance
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GOV.UK. Inheritance Tax – Unused Pension Funds and Death Benefits
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GOV.UK. Technical Consultation – Inheritance Tax on Pensions – Liability, Reporting and Payment