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Key points
Many investors choose to use both Stocks & Shares ISAs and SIPPs together.
There are key differences between the products regarding when you can access your money and how withdrawals are taxed.
The annual amount you can contribute to each account also differs.
Important: This article is for general guidance purposes only and should not be considered investment advice. If you are unsure about the suitability of an investment, please seek out independent financial advice. When you invest, your capital is at risk. Tax treatment will depend on your individual circumstances and could potentially change in the future. Pension rules apply.
Stocks & Shares ISAs and Self-invested Personal Pensions (SIPPs) are both popular tax-efficient wrappers. With both, you don’t pay any tax on any capital gains, income or dividends generated by your investments.
Stocks & Shares ISAs and SIPPs can be used together – many investors don’t choose between having one or the other and lean on both offerings.
The two accounts do have some key differences, however, which could alter how you use them and what contributions you make to each. Let’s run through these here…
When you open an investment account, you probably want to know how you’ll be able to withdraw the money you’re about to (hopefully) build up. This is one point where a Stocks & Shares ISA and a SIPP are different.
You can withdraw money from a Stocks & Shares ISA at any time. In fact, if you have a Flexible Stocks & Shares ISA, you can deposit, withdraw and redeposit money into the same ISA in the same tax year without affecting your annual allowance.
With a SIPP, you can’t usually withdraw your money until you’re 55 years old (rising to 57 in 2028). Taking your money out before this date isn’t illegal, but it does come with a hefty tax penalty.
Once you take your money from either of these accounts, there’s a difference in how it’s taxed.
There is no tax to pay when you withdraw money from a Stocks & Shares ISA. When you withdraw money from a SIPP, you’ll be able to access 25% of it tax-free. You’ll have to pay tax at your marginal rate when accessing the remainder of your pension pot.
There are several options for how to withdraw money from your SIPP, which we’ve rounded up here.
When you contribute money to a SIPP, the government gives you tax relief. At the basic rate, you’ll receive 20% tax relief. That means to add £100 to your SIPP, you only need to pay in £80 from taxed income, with the government adding an additional £20 automatically.
If you’re a higher or additional-rate taxpayer, then you can claim up to 40% or 45% in tax relief from HMRC via self-assessment. You’ll receive tax relief on contributions to your SIPP up to the age of 75.
You won’t receive a “bonus” like this when contributing to a Stocks & Shares ISA, but, as noted above, you also won’t pay tax when you withdraw your money.
You can contribute up to £20,000 in each tax year to a Stocks & Shares ISA. Any contributions made to other ISAs you may hold (say a Cash ISA or Lifetime ISA) will also count towards this.
Presently, you can only contribute to one Stocks & Shares ISA each tax year. In April 2024, this will change, meaning you can add money to more than one Stocks & Shares ISA annually.
With a SIPP, you can contribute either your annual taxable earnings or £60,000 – whichever is lower – each year. Any more than this and you’ll face a tax charge. This amount includes any tax relief and is the total across all pensions – so, if you have a workplace pension in addition to your SIPP, contributions made by both you and your employer will count towards your annual allowance.
If you’re a high earner, you’ll have your annual SIPP allowance “tapered” down depending on your overall earnings. You can read more about this in our guide on your annual allowance for SIPPs.
As mentioned above, many people opt to use both a Stocks & Shares ISA and a SIPP together.
One conventional way of thinking is that an ISA can be used for medium-term investing goals – like a deposit on a house or to pay for a child’s education – while a SIPP is used to invest for retirement.
The pair, however, could also be used in tandem during retirement, which we’ve looked into in this short video.
Of course, how you use your tax wrappers will depend on individual circumstances. If you are unsure how exactly to make use of them, you should seek out independent financial advice.