SIPP vs ISA: the tax treatment, side by side

A SIPP and an ISA can hold the same funds and shares, and both shelter growth from tax while the money stays inside. The difference is where the tax sits. A SIPP is relieved on the way in and taxed on the way out; an ISA is funded from taxed income and pays nothing on the way out. Which wrapper delivers more per pound of outlay is not a matter of opinion — it is arithmetic, decided by the rate of relief going in against the marginal rate coming out, tilted in the pension’s favour by the 25% tax-free element.

Going in

A SIPP contribution attracts income tax relief at the member’s marginal rate (FA 2004 ss.188–192). Under relief at source the scheme adds basic-rate relief automatically — £80 paid in becomes £100 gross (FA 2004 s.192) — and a higher- or additional-rate taxpayer claims the rest through Self Assessment as an extension of the basic rate band (FA 2004 s.192(4); how higher-rate pension tax relief works). Relievable contributions are capped at 100% of relevant UK earnings, or the £3,600 basic amount for a non-earner (FA 2004 s.190), and the total going in is tested against the £60,000 annual allowance (PTM055100).

An ISA subscription gets no relief at all: it is made from income that has already been taxed, and the annual subscription limit is £20,000 (ISA Regulations 1998, SI 1998/1870).

FA 2004 ss.188–192 · PTM055100 · ISA Regulations 1998 (SI 1998/1870).

Coming out

The mirror image. Income and gains inside an ISA are exempt (ITTOIA 2005 Part 6 Chapter 3; TCGA 1992 s.151), withdrawals never appear on a tax return, and they never enter adjusted net income. (The government has announced that from 6 April 2027 interest on cash held inside a stocks-and-shares ISA will bear a flat 22% charge.)

Money leaving a SIPP splits in two. Up to 25% can be taken tax-free — as a pension commencement lump sum or the tax-free element of an UFPLS (PTM063300) — with the tax-free total capped by the £268,275 lump sum allowance (FA 2024 Sch 9; PTM171000). The remaining 75% is taxed as pension income at the member’s marginal rate in the year it is drawn (ITEPA 2003 s.579A), collected through PAYE. How pension withdrawals are taxed sets out the mechanics.

ITTOIA 2005 Part 6 Ch 3 · TCGA 1992 s.151 · PTM063300 · ITEPA 2003 s.579A.

The arithmetic that decides it

Strip the two treatments back and the comparison reduces to one question: is the rate of relief on the way in higher or lower than the marginal rate on the way out? When the two rates are equal, the 25% tax-free element means the pension returns more per pound of net outlay. When the rate out exceeds the rate in, the arithmetic can run the other way. A £10,000 gross contribution, worked both ways:

Basic rate in, basic rate out: the pension returns £8,500 against the ISA’s £8,000 from the same £8,000 of taxed pay — 6.25% more, and the whole margin is the 25% element. Now hold the relief rate and raise the rate on the way out:

Basic rate in, higher rate out: £7,000 against £8,000 — the pension returns less. Run it the other way and the gap widens sharply: a higher-rate taxpayer’s £10,000 gross contribution costs £6,000 net (£2,000 added at source, £2,000 reclaimed through the band extension), and drawn at basic rate it returns the same £8,500 — roughly 41.7% more than £6,000 through an ISA. Even higher rate in and higher rate out leaves the pension at £7,000 against £6,000, about 16.7% ahead, purely from the 25% element. Growth multiplies both wrappers equally, so these ratios hold whatever the investments do. The pension vs ISA tax comparison calculator runs the round trip on your own figures, with no winner declared.

The scope notes around the arithmetic

The tax arithmetic sits inside different rules of access and scale, and they are facts, not verdicts. Adult ISA money (other than a Lifetime ISA, which charges 25% on most withdrawals before 60) is accessible at any age; SIPP money is locked until the normal minimum pension age — 55 now, 57 from 6 April 2028 (FA 2004 s.279). The ISA takes £20,000 a year (from 6 April 2027, no more than £12,000 of it in cash for savers under 65, as announced); the pension has a separate annual allowance tax-charge test, normally £60,000 plus available carry-forward. After an MPAA trigger, money-purchase input above £10,000 can create a charge and carry-forward cannot increase that threshold (PTM056520). Neither allowance caps the contribution itself. Tax relief on personal contributions has its own relevant-UK-earnings limit, with a £3,600 basic amount where applicable (PTM044100). And two routes reach a pension that no ISA can use: employer contributions, and salary sacrifice — which adds National Insurance relief on top of the income tax relief, and is priced by the salary sacrifice pension calculator.

FA 2004 s.279 · FA 2004 s.190 · PTM055100 · PTM056510 · PTM056520.