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SIPP versus ISA: what’s the difference and what are the tax perks?

Saving and investing in a tax-efficient manner is important if you want to get the most out of your money, and there are a number of UK investment accounts that allow you to do this. There’s the SIPP (Self-Invested Personal Pension) account, and then there are a number of ISAs (Individual Savings Accounts), which all offer tax perks. But is one account a better choice than the others?

Let’s take a closer look at the difference between the SIPP, the Stock and Shares ISA, and the Lifetime ISA, and examine the tax relief offered by each.

SIPP

The SIPP is a government-approved personal pension scheme which allows individuals to make their own decisions from a full range of investments including stocks, mutual funds and tracker funds. Within a SIPP, capital gains and income generated are tax-free. Most people have an annual SIPP contribution allowance of £40,000.

The tax relief offered on contributions will depend on your personal income tax rate. Basic-rate taxpayers – who pay 20% – will enjoy tax relief of 20% on their contributions, while higher-rate and additional rate-taxpayers can potentially reclaim another 20% and 25%, respectively.

So, if a basic-rate taxpayer contributes £800 into their SIPP, the government will top up their contribution to £1,000. For someone paying 40% tax, a £1,000 contribution may only cost them £600. SIPP contributions can also be treated as a business expense if you’re self-employed, which can bring down your tax bill further.

Money in a SIPP cannot be touched until age 55 (57 from 2028). At this age, you can take 25% of your pot tax-free, while other withdrawals will be added to your income and taxed at your normal rate.

Overall, the SIPP is an effective savings vehicle for those looking to save for retirement while minimising tax. It could be particularly effective for those on higher incomes, as well as those who are self-employed. 

Stocks and Shares ISA

The Stocks and Shares ISA is a tax-efficient savings vehicle that also allows savers to hold a wide variety of investments. Like the SIPP, all capital gains and income are tax-free. Each adult can contribute up to £20,000 per year into their ISA.

One of the main advantages of this type of investment is its flexibility as, unlike the SIPP, money can be withdrawn at any time.

Overall, it’s ideal for those looking to save and invest for the future tax-efficiently, while looking for a little bit more flexibility with their money.

Lifetime ISA

Finally, the Lifetime ISA is a unique ISA open to those aged 18-40. This type of ISA is similar to the Stocks and Shares one in that it allows you to invest in a broad range of investments tax-free. But it also has the added benefit of coming with 25% bonus top-ups from the government, up to age 50. The annual allowance is £4,000, meaning savers can potentially pocket £1,000 for free if they contribute the full allowance.

The downside to this ISA is that the money can’t be touched – without harsh penalties – until you either turn 60 or buy your first property, so it is a little inflexible. Overall, however, its 25% bonuses make it an attractive retirement savings vehicle.

In summary, all three accounts have advantages and disadvantages and the best account will depend on your own personal circumstances. As always, don’t hesitate to seek expert advice if you need further clarification. 

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