A lot of people are completely unaware of this amazing tax break. In fact, according to online investment broker Hargreaves Lansdown, around half of Britons have absolutely no idea the government is willing to top up their pension if they make a contribution. These people could be missing out on a fortune.

Indeed, last year Hargreaves claimed over £120m in tax relief for its SIPP customers. That’s a substantial amount of free money. Interested in receiving a share of the spoils? Here’s what you need to know.

How tax relief works

The way tax relief works is that if you make a contribution into a SIPP account, the government will essentially hand you back the tax you’ve already paid on your money in the form of a bonus payment into the account. So, the tax relief you receive will depend on how much tax you pay.

Basic-rate taxpayers currently receive 20% tax relief on contributions. This means if you contribute £800 into a SIPP, the government will add another £200 for you to take your total contribution to £1,000.

The best bit about this amazing perk is that you don’t need to do anything at all to get this bonus money as your pension provider will claim it for you and automatically add it to your account.

If you’re a higher-rate taxpayer that pays 40% tax, you can claim back an additional 20% through your tax return. This means that a £1,000 contribution will only cost you £600. And if you’re a top-rate taxpayer that pays 45% tax, you can claim back another 25% through your tax return. In this scenario, a £1,000 contribution will cost just £550.

Who’s eligible and how much can you contribute?

You’ll qualify for SIPP tax relief if you’re a UK resident under the age of 75. To receive tax relief, your personal contributions can’t be any higher than your earnings. In terms of how much you can contribute, the maximum amount you can deposit into a SIPP each tax year is generally £40,000 (there are some exceptions to be aware of), and this includes the tax relief you receive from the government.

Money for nothing

Overall, SIPP tax relief is a fantastic tax break. It literally is money for jam. It’s so easy to take advantage of too. These days, you can generally open a SIPP account and make a contribution within minutes.

And there’s no rush to actually invest the money in a SIPP – you can leave it sitting in cash if that’s your preference. If you’re looking for an easy way to boost your retirement savings, SIPP tax relief could definitely be worth considering.

The post 50% of Britons are unaware of this amazing retirement saving trick appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.