If you’re a British citizen over the age of 18, there is nothing to stop you from having both an ISA and a Sipp. Both are efficient wrappers to help your investments grow free of capital gains and dividend tax.

But which allowance should you use first? And are there other factors you should consider before setting up either account?

Absolutely. This article will compare the ISA and Sipp wrappers to help you make the best decision. Will be be covering:

  • The key differences between the Sipp and the ISA tax wrappers

  • Why long-term compounding has a greater impact in the Sipp

  • The restrictions on withdrawing money from your Sipp

  • Inheritance tax

What is a Stocks and Shares ISA?

An ISA is a tax-free savings account. Money saved within the ISA wrapper isn’t charged any tax on capital gains or dividends. All eligible ISA participants receive a £20,000 annual allowance. This renews at the end of each tax year on 5 April and you can’t roll your ISA allowance over into a new tax year. Use it, or lose it. For now, there is no upper limit for how much you can save in an ISA. The only restriction is your £20,000 annual allowance.

You can take the profits out of your ISA account at any time and you don’t pay any tax on the withdrawals.

What is a Sipp?

The Self Invested Personal Pension (Sipp) is a wrapper which allows you to save for your retirement free of capital gains and income tax. The Sipp allowance is part of your overall pension allowance - you can save the equivalent of 100% of your income in your pension (up to £60,000) every year. This allowance can be rolled over for three years. 

When you contribute to your Sipp, the government will top up your contribution by 20% to compensate for the income tax you have already paid on that money. If you are a higher rate income tax payer, you can apply for additional tax relief.

Any money saved in your Sipp can be used to pay you an income in retirement. You can take 25% out as a tax free lump sum (up to a maximum of £268,250 -equivalent to 25% of the previous lifetime allowance) and then…

Unlock the rest of this article with a 14 day trial

or Unlock with your email

Already have an account?
Login here