Contributing to a SIPP: How much can you pay in and how does tax relief work?

How SIPP contributions work

SIPP contributions follow the same principles as other personal pensions, with automatic tax relief for basic rate taxpayers and additional claims available for higher earners.

Personal vs employer contributions

You can contribute to your SIPP through personal contributions from your own income or through employer contributions if your employer is willing to pay into your SIPP (although unlike workplace pensions, your employer is never obliged to contribute to your SIPP).

• Personal contributions: Money you pay into your SIPP from your salary, self-employment income, savings, or other sources. These contributions are limited to 100% of your annual earnings or the Annual Allowance (currently £60,000), whichever is lower.
• Employer contributions: Money your employer pays directly into your SIPP on your behalf. These contributions aren't limited by the 100% of earnings rule (only personal contributions are), but employer contributions do count towards the £60,000 Annual Allowance.

Tax relief at source (20%)

Most SIPPs use 'relief at source', where you contribute money that's already been taxed and your SIPP provider automatically claims back 20% basic rate tax relief from HMRC.

For example, if you want to contribute £1,000 in your SIPP, then you actually pay £800 and your provider claims £200 from HMRC, giving you the full £1,000. This happens automatically without any action required from you beyond making the contribution.

This automatic process means basic rate taxpayers receive full tax relief without needing to do anything beyond contributing. The system is designed to be simple (particularly for basic rate taxpayers) and to encourage pension saving.

Higher and additional rate relief via self-assessment

Higher rate (40%) and additional rate (45%) taxpayers receive 20% tax relief automatically just like everyone else, but can also claim additional relief through their tax return.

• Higher rate taxpayers: Claim an additional 20% relief through self-assessment. A £1,000 gross contribution (you paid £800, HMRC added £200) gives you another £200 back through your tax return, making your net cost £600 for £1,000 in your pension.
• Additional rate taxpayers: Claim an additional 25% relief. The same £1,000 gross contribution gives you £250 back through your tax return, making your net cost £550.

Higher and additional rate taxpayers need to complete a self-assessment tax return and include their gross pension contributions (the amount including basic rate relief). HMRC then adjusts their tax code or provides a refund. If you're employed and don't normally file self-assessment, you'll need to register or contact HMRC to arrange a tax code adjustment.

Many higher and additional rate taxpayers forget to claim this extra tax relief, effectively losing thousands of pounds that they're entitled to. Don't make this mistake. Set a reminder to claim your relief each tax year (although once you file the first self-assessment HMRC will remind you to file again each year).

Gross vs net contributions

It’s important to understand the difference between gross and net contributions in order to track your true contribution amounts and avoid exceeding allowances.

• Net contributions: The actual cash you pay from your bank account, less any refunds from HMRC for higher tax brackets. For example, £800 paid from your account is an £800 net contribution.
• Gross contributions: The amount including tax relief. That same £800 net contribution becomes £1,000 gross once HMRC adds 20% relief.

Annual Allowance limits are measured in gross terms, so it’s important to track the gross contributions rather than the net amounts that left your account.

Allowances and limits when contributing to a SIPP

Several limits govern how much you can contribute to pensions each year, and breaching these limits would trigger tax charges that can erode your retirement savings.

Annual Allowance (£60,000 or 100% of earnings)

The Annual Allowance caps the amount you can contribute to pensions with tax relief in any single tax year. For most people, this is £60,000 for the 2025-26 tax year.

Two limits that both apply:

• £60,000 Annual Allowance: This is the maximum across all your pensions combined, including workplace pensions, personal pensions, and SIPPs. It includes both your contributions and any employer contributions.
• 100% of earnings limit: Your personal contributions also can't exceed your annual earnings from employment or self-employment. If you earn £35,000 per year, you can personally contribute up to £35,000 (or £28,000 net with £7,000 tax relief added), even though the Annual Allowance is £60,000.

If you accidentally breach these limits you’ll pay tax on the excess at your marginal rate, effectively clawing back the tax relief you shouldn't have received.

Carry forward of unused allowances (3 years)

If you haven't used your full Annual Allowance in the previous three tax years, you can ‘carry forward’ that unused allowance to make larger contributions now.

How carry forward works:

You can look back at the previous three tax years and use any unused Annual Allowance from those years, on top of this year's allowance. This could potentially allow you to contribute up to £240,000 in a single year if you hadn't used any allowance for the previous three years and have sufficient earnings.

There are some rules to bear in mind when using the carry forward rule:

• You must have been a member of a UK registered pension scheme in the years you're carrying forward from (even if you didn't contribute)
• You must use the current year's Annual Allowance first before accessing previous years
• You must have sufficient earnings this year to cover your personal contributions (although employer contributions can exceed earnings)
• Unused allowance is based on using the oldest year first.

Carry forward is particularly valuable for people receiving bonuses, inheritances, or experiencing unusually high earnings years. However, the calculations can be complex, particularly if you've already made partial contributions in previous years, so consider seeking advice for large carry forward contributions.

Money Purchase Annual Allowance (MPAA) once you've flexibly accessed a pension (£10,000 cap)

If you've started taking flexible benefits from any pension, your Annual Allowance reduces permanently to £10,000 for money purchase (Defined Contribution) pensions.

The MPAA will be triggered if you: 

• Take taxable income from flexi-access drawdown
• Take an Uncrystallised Funds Pension Lump Sum (UFPLS)
• If you receive income from a fixed term annuity
• Receive flexible withdrawals from a pension you've transferred.

But it won’t be triggered by:

• Taking only your 25% tax-free lump sum
• Buying a lifetime annuity
• Taking small pot lump sums (£10,000 or less per pot)
• Taking serious ill-health lump sums.

Once triggered, the MPAA applies for the rest of your life across all your Defined Contribution pensions, including your SIPPs. If you're still working and contributing, this restriction can significantly limit your pension saving capacity.

For more information, see our guides on pension contributions and accessing your SIPP.

Relevant UK earnings - what counts and what doesn't

Tax relief on personal pension contributions is limited to your 'relevant UK earnings', which has a very specific definition under tax law.

What counts as relevant UK earnings:

• Employment income (salary, wages, bonuses)
• Self-employment trading income
• The annual value of taxable ‘benefits in kind’ like a company car or private medical insurance
• Statutory sick pay or statutory maternity pay.

What doesn't count:

• Dividend income (even from your own company)
• Investment income (interest, fund distributions)
• Rental income from buy-to-let property
• State Pension
• Pension income from other pensions
• Capital gains.

Salary vs dividend income for company directors

Company directors often take a mix of salary and dividends, but only salary counts as relevant UK earnings for pension contribution purposes.

This can cause complications when it comes to saving for retirement, because many directors take low salaries (often around £12,570 in order to use the Personal Allowance) coupled with larger dividends to minimise National Insurance liability. However, this creates a challenge for pension contributions since dividends don't count as relevant earnings.

There are two strategies directors can take to overcome this retirement planning hurdle:

• Increase your salary: If you take a larger share of your company’s revenue as salary instead of dividends, then you’ll be able to contribute more money to your SIPP. Of course, this also means you’ll face a higher National Insurance bill, so it’s important to weigh up the numbers.
• Use employer contributions: Rather than increasing your salary, you can make higher employer contributions from your company to your SIPP. These aren't restricted by your personal earnings, receive Corporation Tax relief, and avoid National Insurance entirely, but it’s important to ensure that the amounts in question are commercially justified and “wholly and exclusively” correlated to the director’s work for the business.

Tax benefits of contributing to a SIPP

SIPP contributions provide multiple tax advantages that make them a very tax-efficient way to build your retirement wealth.

How contributions reduce Income Tax

Pension contributions reduce your taxable income, lowering your Income Tax liability and potentially keeping you below key tax thresholds.

Direct tax relief: Basic rate taxpayers receive 20% tax relief automatically. Higher and additional rate taxpayers can claim back the extra tax they’ve paid through self-assessment.

Reducing adjusted net income: Pension contributions reduce your 'adjusted net income' for tax purposes, which determines eligibility for:

• Personal Allowance (reduced once your income exceeds £100,000)
• Child benefit (tapered between £60,000 and £80,000 adjusted income)
• Tax-free childcare.

Interaction with the Child Benefit taper and Personal Allowance taper

Pension contributions reduce your adjusted net income, which governs two important tax-free allowances.

Child Benefit taper (£60,000 to £80,000)

With two children, full Child Benefit is currently £2,251.60 per year. If your adjusted net income exceeds £60,000, you start losing this Child Benefit at a rate of 1% for every £200 you are above this threshold.

By £80,000, you lose it entirely.

Making pension contributions reduces your adjusted income, potentially keeping you below £60,000 entirely, or at least partially reducing the impact of the taper. This makes pension contributions a very tax-efficient option for people with income between £60,000 and £80,000.

Personal Allowance taper (over £100,000):

Once your adjusted net income exceeds £100,000, you lose £1 of your Personal Allowance for every £2 your income is above this threshold. By £125,140, you lose the entire Personal Allowance.

Example: Someone earning £105,000 loses £2,500 of their Personal Allowance, costing them £1,000 extra in tax (at a 40% tax rate). Contributing £5,000 net (£6,250 gross) reduces their adjusted income to £98,750, preserving their full Personal Allowance. The £5,000 net contribution costs them just £2,750 after higher rate tax relief (£1,250 rate relief at the 40% tax rate) and Personal Allowance protection (£1,000).

These calculations can become complex for higher earners, but they demonstrate the value of pension contributions for high income individuals facing these tapers.

Corporation tax savings for directors (employer contributions as a business expense)

Employer SIPP contributions from your limited company provide Corporation Tax relief, which means they reduce the net cost of building your pension. Since employer pension contributions are allowable business expenses, they reduce your company's taxable profit and thus your Corporation Tax bill.

However, employer contributions must be commercially justified, "wholly and exclusively" for business purposes, and proportionate to the director's role and remuneration. HMRC scrutinises large contributions, particularly in small companies with few employees. Excessive contributions could be challenged as distributions rather than valid business expenses.

Methods of contributing to a SIPP

There are several different ways of contributing to a SIPP, each with advantages depending on your financial situation and goals.

Lump sum contributions vs regular contributions

Lump sum contributions: Paying large amounts into your SIPP in one go, perhaps from bonuses, inheritances, or accumulated savings.

• Advantages: A large lump sum contribution gets money invested immediately, potentially benefiting from compound growth sooner. This might be useful for using carry forward or avoiding year-end deadline pressure.
• Disadvantages: Obviously this type of contribution requires you to actually have a large lump sum of cash ready to contribute. Lump sums also expose you to more ‘timing risk’, because if you invest a large amount just before a market fall then the value of that contribution could be eroded.

Regular contributions: Setting up monthly or quarterly contributions of fixed amounts.

• Advantages: Regular, ongoing contributions build a consistent savings habit, while also reducing timing risk by averaging your entry price over time (known as pound-cost averaging). Most people also find it easier to budget around regular payments than finding large lump sums, and it’s also worth noting that many providers offer free or reduced dealing charges for regular investments.
• Disadvantages: Requires discipline to maintain payments during tough months, particularly if your income is unpredictable or unstable.

For most people, the best plan might be to make regular monthly pension contributions, while adding lump sums to their pension pot when they receive bonuses, tax refunds, an inheritance, or other cash windfalls.

Employer contributions vs personal payments

If you're a company director or your employer is willing to contribute to your SIPP, then employer contributions offer significant tax advantages over personal contributions.

Employer contributions:

• Don't count against your earnings limit (only personal contributions do)
• Provide Corporation Tax relief for the business
• Avoid employer and employee National Insurance entirely
• Still receive full pension tax benefits

Personal contributions:

• Limited to 100% of your relevant UK earnings
• You receive tax relief through relief at source
• More administratively simple for employed people

In practice, if you’re a director or a limited company or you have an employer who has agreed to contribute to your SIPP then you’re almost certainly going to combine both types of contributions, with employer contributions up to a certain level and personal contributions on top of that.

Direct debit, bank transfer, standing order

Most SIPP providers accept contributions through multiple payment methods.

• Direct Debit: Set up automatic monthly collections from your bank account. This is the most convenient method for regular contributions, as it's automatic and some providers offer free dealing for direct debit contributions.
• Bank transfer: One-off payments sent from your bank to your SIPP provider. Useful for lump sum contributions or ad-hoc payments when you have extra money available.
• Standing order: You set up regular fixed payments from your bank. Similar to Direct Debit, except that you push the funds from your end rather than the provider collecting the money from your account.
• Debit card: Some providers accept debit card payments for contributions, although this is only likely to be an option for smaller amounts.

The method you use to contribute to your pension doesn't affect tax relief, you still receive 20% automatically regardless of the payment method.

Using bonuses, dividends, or windfalls

Occasional large payments like bonuses, dividend payments, inheritance, or tax refunds provide excellent opportunities for substantial pension contributions.

• Annual bonuses: If you receive a significant work bonus, contributing a large portion to your SIPP before the tax year ends can provide substantial tax relief.
• Dividend income: While dividends don't count as relevant earnings for pension contribution limits, you can still use dividend income to fund personal contributions up to your earnings limit, or better yet, structure your company's dividend policy to favour employer SIPP contributions instead.
• Inheritance or windfalls: Large one-off amounts can be spread across tax years using carry forward if necessary, maximising tax relief. However, ensure you have sufficient earnings to cover the contributions or they won't receive full tax relief.
• Tax refunds: If you receive a tax refund (perhaps from reclaiming higher rate pension tax relief), contributing this back to your SIPP compounds the benefit.

Transferring existing pensions into a SIPP (vs contributing fresh money)

Pension transfers move existing retirement savings into your SIPP but don't count as new contributions and don't affect your Annual Allowance.

This is important because it means you can transfer £100,000 or £200,000 from old pensions into your SIPP and still contribute the full £60,000 in new contributions that same tax year, provided you have sufficient earnings.

For more information about pension transfers, see our guide on transferring into a SIPP.

Optimising contributions by life stage

The optimal contribution strategy changes as you progress through your career, with different priorities and opportunities at each stage.

In your 30s: Build habit, start small but consistent, exploit compounding

Your 30s offer the longest investment timeframe, meaning even modest contributions can grow a lot through decades of compound returns.

• Start small if necessary: Contributing £200 per month (£2,400 net annually, £3,000 gross with tax relief) from age 30 to 67 at 5% annual growth produces approximately £280,000. Starting the same contributions at 40 would only produce £165,000. That 10-year delay costs £115,000.
• Build the savings habit: Automatic monthly contributions through direct debit make pension saving effortless and consistent, with the habit becoming embedded before competing demands intensify.
• Maximise employer matching: If you have access to a workplace pension, contribute enough to get full employer matching before considering a SIPP. Free money from employer contributions beats any investment return.
• Accept higher risk: With 30-plus years until retirement, you can weather market volatility. Don't hold excessive cash or bonds in your SIPP at this age.
• Focus on consistency over amount: Contributing £200 monthly every year beats contributing £500 monthly for a few years then stopping. Consistency and time matter more than contribution size when you're young.

In your 40s: Balance family and mortgage with pension saving, use carry forward if affordable

Your 40s often bring competing financial demands but also increasing earning power, requiring careful balancing of priorities.

• Don't neglect pensions for mortgage overpayments: While paying down your mortgage feels satisfying, pension contributions provide tax relief that mortgage overpayments don't. Contributing to your pension usually delivers better returns after accounting for tax benefits.
• Use carry forward during high-earning years: If you've under-contributed in previous years and now have higher income, carry forward allows larger contributions. This is particularly valuable if you receive a bonus or promotion.
• Balance family costs with retirement saving: Children are expensive, but completely stopping pension contributions in your 40s makes retirement much harder. Even maintaining modest contributions keeps your pension growing during expensive child-rearing years.
• Consider increasing contributions with pay rises: Each time you receive a pay rise, increase your pension contribution by a portion of the increase before lifestyle inflation consumes it all.
• Review old pensions: Your 40s are a good time to consolidate old workplace pensions from previous employers into your SIPP for easier management.

In your 50s: Catch-up contributions, use higher earnings peak to maximise tax relief

Many people reach peak earning years in their 50s, providing an opportunity for substantial catch-up contributions if earlier saving was limited.

• Maximise contributions during peak earnings: If you're earning £80,000 to £100,000 or more, you can afford larger contributions while receiving 40% or 45% tax relief, dramatically reducing the net cost.
• Use carry forward aggressively: If you've under-contributed in previous years, your 50s might be your last opportunity to use carry forward before retirement. Contributing £100,000 or more in a single year might be possible if you have three years of unused allowances.
• Consider employer contributions if you're a director: Your 50s might be the time to make substantial employer contributions from your limited company, reducing corporation tax while building pension wealth before retirement.
• Don't trigger MPAA prematurely: If you're still working and contributing, avoid accessing pension benefits until you've finished building your pension pot.
• Start reducing investment risk: While still building your pension, begin gradually shifting towards more conservative investments as retirement approaches. You have less time to recover from market downturns than in your 30s and 40s.

In your 60s: Final contributions before drawdown, avoid triggering MPAA too early

Your 60s represent the final years for pension contributions, with careful timing crucial to avoid accidentally restricting your contribution capacity.

• Final contribution push: If you're still working, maximise contributions in these final years, particularly if you're a higher or additional rate taxpayer. Every £10,000 contributed might only cost you £5,500 to £6,000 after tax relief.
• Don't access benefits prematurely: If you plan to continue working past 55 (or 57 from 2028) and contributing, take only your tax-free cash initially. Accessing taxable income triggers the MPAA, limiting future contributions to £10,000.
• Consider timing carefully: If you're planning to retire at 62, you might continue full contributions until 61, then access benefits knowing you won't be contributing anymore. This preserves your £60,000 Annual Allowance for those final contribution years.
• Employer contributions until retirement: Company directors can continue making substantial employer contributions until they stop working, building pension wealth efficiently in those final years.
• Shift to capital preservation: By your mid-60s, most of your SIPP should be in lower-risk investments like bonds and defensive funds, protecting the capital you've accumulated rather than chasing growth.

Interaction with other wrappers

SIPPs compete with other savings vehicles for your available income, requiring strategic decisions about where to direct money.

SIPP vs ISA contributions

SIPPs and ISAs offer different tax advantages and access rules, making them complementary rather than competing options.

SIPP advantages:

• Upfront tax relief
• Tax-free investment growth
• Currently outside estate for inheritance tax (although this is changing in April 2027)
• Employer contributions are possible.

SIPP disadvantages:

• Can't access before 55 (rising to 57 from 2028)
• Withdrawals (beyond 25% tax-free) are taxed as income
• Money Purchase Annual Allowance restricts future contributions once accessed.

ISA advantages:

• Complete flexibility to access anytime without penalties
• All withdrawals are tax-free
• No restrictions on how much you can hold (other than the annual ISA allowance)
• Simple to understand.

ISA disadvantages:

• No upfront tax relief on contributions
• £20,000 annual contribution limit for 2025-26
• Must be funded from after-tax income
• Included in estate for inheritance tax.

In practice, most people can benefit from using both wrappers strategically:

• Maximise pension contributions while working for upfront tax relief and long-term growth
• Build ISA savings for flexibility before pension age or for tax-free income alongside pension withdrawals in retirement
• Use ISAs for emergency funds or medium-term goals while pensions remain for long-term retirement

When to prioritise SIPP over mortgage overpayment or ISA

This common financial dilemma has no single answer, but some principles can help guide decisions.

Prioritise SIPP contributions when:

• You're a higher or additional rate taxpayer (40% to 45% tax relief usually beats mortgage interest savings)
• Your employer offers matching contributions (always take free money first)
• You're significantly behind on retirement saving
• Your mortgage rate is low (below 4% to 5%)
• You're in your 50s or later with limited time to build pension wealth.

Prioritise mortgage overpayments when:

• Your mortgage rate is high (above 5% or 6%)
• You're a basic rate taxpayer with a low income (only getting 20% relief)
• Becoming mortgage-free before retirement is a priority for peace of mind
• You already have adequate pension savings
• You're remortgaging soon and reducing the balance helps secure better rates.

Prioritise ISAs when:

• You'll need access to money before the age of 55/57
• You've used your full Annual Allowance already
• You want complete flexibility

Many people split their money, contributing enough to pensions to get employer matching and benefit from tax relief, making some mortgage overpayments for peace of mind, and building ISA savings for flexibility. This diversification across different wrappers provides both tax efficiency and flexibility.

Role of Lifetime ISA (for under-40s) alongside a SIPP

Lifetime ISAs (LISAs) offer a 25% government bonus on contributions up to £4,000 per year (maximum £1,000 bonus annually) for people under 40, creating an interesting alternative or complement to SIPPs.

LISA advantages:

• 25% government bonus (similar to 20% basic rate pension tax relief)
• Can be accessed from age 60 without penalties
• Can be used for first-time house purchase without penalties
• Withdrawals are completely tax-free
• Simpler than pensions with no need to claim additional relief.

LISA disadvantages:

• Only £4,000 annual contribution limit (much lower than a pension’s £60,000 limit)
• Can't open a LISA if you're 40 or older, and can’t pay into it after the age of 50
• 25% penalty for withdrawals before the age of 60 (except first home purchase or terminal illness)
• No employer contributions are possible
• Only basic rate equivalent bonus (higher rate taxpayers get better relief from pensions).

Strategic use alongside SIPPs:

For people under 40, particularly basic rate taxpayers, LISAs can complement SIPPs:

• If you're saving for a first home: You could max out the LISA (£4,000 annually) for the house purchase option while contributing to your SIPP for retirement.
• If you're a basic rate taxpayer: The LISA's 25% bonus matches pension tax relief, but with more flexibility from age 60. Consider splitting between both.
• If you're a higher rate taxpayer: Prioritise pension contributions where you receive 40% tax relief, using the LISA only after maximising valuable pension contributions.
• If you're approaching 40: Open a LISA before your 40th birthday even if you only contribute small amounts initially, as you can't open one after 40.

The £4,000 LISA limit means it won't replace pension saving for most people, but it can be a useful additional wrapper for younger workers, particularly those planning to buy a house or wanting more flexibility than pensions offer.

Risks and pitfalls when contributing

Several common mistakes can undermine the benefits of SIPP contributions or create unexpected tax charges.

Overcontributing (breaching allowances)

Exceeding your Annual Allowance triggers an Annual Allowance charge, effectively clawing back tax relief you shouldn't have received.

If you do breach the allowance accidentally, you must declare this on your self-assessment tax return and pay the charge. Your pension provider should inform you if contributions exceed limits, but ultimately tracking this is your own responsibility.

Forgetting to reclaim higher and additional rate relief

Higher and additional rate taxpayers often miss out on thousands of pounds by failing to claim the additional tax relief they're entitled to.

It’s a good idea to set a calendar reminder each April to claim your relief for the previous tax year. Don't leave money on the table that's rightfully yours.

Triggering MPAA by mistake (small UFPLS, drawdown)

Many people accidentally trigger the Money Purchase Annual Allowance without realising the permanent consequences, limiting future pension contributions to just £10,000 a year.

Once triggered, the MPAA applies for life with no way to reverse it. If you're earning £80,000 and capable of contributing £30,000 annually, triggering the MPAA prematurely by taking £5,000 from your pension could cost you hundreds of thousands in lost pension saving capacity over the following decade.

Locking money away until minimum pension age (55 or 57)

The generous tax relief on pension contributions comes with the restriction that you can't access the money for decades. If you contribute at 30, you're locking that money away for at least 27 years from 2028. 

One way to avoid the issue of needing access to funds you’ve put out of reach in your SIPP is to build an emergency fund (3 to 6 months' expenses) in accessible accounts before maximising your pension contributions.

Not aligning contributions with investment strategy

Contributing to your SIPP but leaving money in cash or not investing it appropriately wastes the tax relief and growth potential.

• Contributing but not investing: Money sits in your SIPP cash account earning minimal interest while inflation erodes its value, wasting the tax relief benefit and compound growth opportunity.
• Inappropriate risk for timeframe: Contributing in your 30s but holding 80% in cash and bonds misses decades of potential equity growth. Conversely, contributing in your 60s and holding 100% in volatile small-cap stocks creates unnecessary risk.
• Random fund selection: Choosing investments without clear strategy or understanding, ending up with poorly diversified portfolios or expensive active funds that underperform.
• Set-and-forget approach: Contributing for years without reviewing whether your original investment strategy still makes sense as you age and circumstances change.

It’s important to develop a clear investment strategy before contributing, understanding which assets you'll hold and why. Invest contributions promptly rather than letting cash accumulate, and review your portfolio at least annually, adjusting as you age or circumstances change. If you lack investment confidence, consider seeking advice or using low-cost diversified funds rather than trying to pick individual shares without experience.

For more guidance on SIPP investments, see our article on what is a SIPP.

How to decide on a contribution target

Your ideal contribution amount depends on your retirement goals, current age, existing pension savings, and expected retirement age.

To calculate how much you’ll need to contribute, you can work backwards from your retirement goals:

1. Estimate desired retirement income (often 50% to 70% of final salary)
2. Subtract guaranteed income (State Pension, defined benefit pensions)
3. Calculate pension pot needed to provide the gap (roughly 25 times annual income needed)
4. Consider your current pot, years until retirement, and expected growth
5. Calculate annual contributions needed to reach your target

Alternatively, you can use a common rule of thumb that suggests contributing half your age as a percentage of your salary when you start pension saving.

So for example, if you start contributing to a SIPP at age 30, this rule of thumb would indicate that you should contribute 15% of your current salary, and continue to contribute 15% throughout your career.

Of course, this rule of thumb is fairly general and doesn’t account for existing pension pots, doesn't consider your individual retirement income goals, and assumes you’re able to be consistent with contributions throughout your career, which isn’t always realistic during expensive life stages like raising children.

Use this as a rough guide rather than gospel. If you can afford more, contribute more. If this seems impossible, start with what you can afford and increase gradually.

Building contributions into cashflow planning

Integrating pension contributions into your monthly budget ensures consistent saving without creating financial stress.

• Treating pensions as a priority bill: Schedule pension contributions as you would mortgage or rent payments, paying yourself first before discretionary spending. This mental framing makes contributions automatic rather than optional.
• Automating contributions: Direct debits remove the monthly decision about whether to contribute, making saving automatic. Once set up, you adjust your spending around the reduced income rather than having to actively decide to contribute each month.
• Using salary sacrifice where available: If your employer offers salary sacrifice, pension contributions come out before you see your net pay, making the reduction less noticeable while improving efficiency through National Insurance savings. However, from April 2029 this option will become a little less cost effective, because tax changes that will come into effect then will mean you’ll have to pay National Insurance Contributions on any amounts over £2,000 a year via salary sacrifice.
• Increasing contributions with pay rises: Each time you receive a pay rise, increase your pension contribution by a portion of the increase (perhaps 50%). Your take-home pay still increases but you've also improved retirement saving without feeling the impact.

Special considerations for directors

Company directors have unique opportunities to structure their remuneration tax-efficiently through pension contributions.

Employer contributions vs dividends: tax efficiency

Directors of profitable companies can choose between taking income as dividends or making employer pension contributions, with very different tax outcomes.

Dividend route:

• Company pays Corporation Tax on profits first (19% to 25%)
• Remaining profit distributed as dividends
• Director pays dividend tax (8.75% to 39.35% depending on total income)
• Money available immediately but taxed twice.

Employer pension contribution route:

• Contribution is an allowable business expense
• Reduces company's taxable profit (corporation tax relief)
• No National Insurance charges
• No personal income tax until withdrawn in retirement
• Money locked until pension age but grows tax-free.

Pension as part of a remuneration strategy

For company directors, pension contributions should be integrated into overall remuneration planning alongside salary, dividends, and other benefits.

A suitable way to structure this for company directors might be something like this:

1. Salary up to National Insurance threshold (£12,570) or Personal Allowance
2. Substantial employer pension contributions (£20,000 to £60,000, depending on profits)
3. Dividends to provide current income needs
4. The company retains some profit for working capital and growth.

Using a SIPP to buy business premises with company contributions

Some SIPPs allow commercial property investment, creating opportunities for directors to use pension contributions to purchase premises that the company then leases.

However, this strategy is complex and potentially expensive which means you’d need specialist advice from advisers experienced with SIPP property investments if you’re considering this option.