Pensions and tax
Tax on contributions
Pensions are a tax-efficient way of saving. Every time you contribute, your contributions cost you less than the amount going towards your pension because your contributions are taken from your salary before income tax is calculated. And if you pay through salary sacrifice, you will also make national insurance savings.
If you pay into your pension through salary sacrifice, your salary is reduced by the amount you've decided to pay and Nestlé pays the money in on your behalf. This means that you don’t pay national insurance on the value of your pension contributions and your contributions cost you even less.
To find out more about salary sacrifice, see Making contributions.
John's salary is £20,000. He contributes 4% of his salary. The monthly total going into his account is as follows:
However, you make tax and national insurance savings on the money you pay towards your pension. This means that the actual cost of these contributions to John is lower.
Jane's salary is £25,000. She contributes 5% of her salary. The monthly total going into her account is as follows:
However, you make tax and national insurance savings on the money you pay towards your pension. This means that the actual cost of these contributions to Jane is lower.
If Jane were to contribute 8% of her salary, the monthly total going into her account would change as follows:
Then, because the £166.67 includes tax and national insurance, Jane's contribution only costs her
John's salary is £20,000. He contributes £100 of his salary every month. However, you make tax and national insurance savings on the money you pay towards your pension. This means that the actual cost of these contributions to John is lower.
Jane's salary is £20,000. She contributes £150 of her salary every month. However, you make tax and national insurance savings on the money you pay towards your pension. This means that the actual cost of these contributions to John is lower.
To get an idea of how much paying into a pension costs you, log in and use the modeller, or choose the salary closest to yours in the table below:
The above figures assume you are a basic-rate taxpayer and you make contributions through salary sacrifice (meaning you make national insurance savings).
Pensions are a very tax-efficient way to save, and up to a certain amount you won’t have to pay a tax charge on your savings. That said, the Government has put some overall maximum limits in place for people paying large sums into their pension pots if they don’t want to pay tax on their pension savings.
There are two main allowances that you may need to bear in mind when saving into your pension. These are the annual allowance (sometimes referred to as the 'AA') and the lifetime allowance (sometimes referred to as the 'LTA').
Annual allowance (AA)
This is the maximum amount that you can save in pension benefits from all sources (excluding state pension) in a tax year, without you having to pay a tax charge. The annual allowance is £40,000 for 2020/21 for most people. If you exceed the annual allowance, you must declare the excess and pay the charge as part of your annual income tax return.
If you exceed the annual allowance, you must declare the excess and pay the charge as part of your annual income tax return. However, if you haven’t used all of your annual allowance for the past three tax years, you can carry forward the unused amount. You must also declare this on your income tax return.
It’s your responsibility to check your pension savings against the annual allowance. If you think you might exceed it, contact Nestlé Pensions know.
If you access your benefits flexibly*
Your annual allowance is lower if you:
- Started to take benefits from a DC pension arrangement on or after 6 April 2015; and
- Accessed your benefits from that arrangement 'flexibly'* on or after 6 April 2015.
If this is the case, the total amount of money you can pay to a defined contribution arrangement like DC Core or DC Start (including Nestlé’s contributions) is £4,000 a year. This limit is known as the 'money purchase annual allowance'.
- You took all of your retirement savings as a cash lump sum, or
- You're withdrawing money directly from your retirement savings to provide a regular income (known as 'flexi-access drawdown').
The money purchase annual allowance will not apply to you if used your DC benefits to buy an annuity or take tax-free cash to provide a regular income.
If you earn £200,000 a year or less
For most people, if your total UK taxable income (including any income you gave up as part of a salary sacrifice arrangement) is £200,000 or less, your annual allowance remains £40,000.
If you earn more than £200,000 a year
If you earn more than £200,000 a year (including any income you gave up as part of a salary sacrifice arrangement), HMRC carry out something called an ‘adjusted income test’.
This means that they look at:
- your total taxable income for the year
- any savings that you and your employer made to your DC pension account(s), and
- the value that they (HMRC) put on how much your DB pension has increased over the year.
If this is more than £240,000 (known as your ‘adjusted income’) your annual allowance will be reduced. So for every £2 of ‘adjusted income’ that goes over £240,000, your annual allowance reduces by £1 - known as your tapered annual allowance.
If you earn more than £312,000
If your adjusted income is £312,000 or more, your annual allowance is reduced to a minimum £4,000.
When your contributions are measured against the annual allowance
The period in which the pension benefits you earn in the Fund are measured against the annual allowance is known as the ‘pension input period’. This runs from 6 April each year to the following 5 April.
What to do if you go over the annual allowance
If you exceed your annual allowance, you may be able to use 'carry forward' to get tax relief and offset or reduce your annual allowance charge. Carry forward allows you to make use of any annual allowance that you have not used during the three previous tax years, providing you were a member of a registered pension scheme.
Lifetime allowance (LTA)
This is the total amount of pension benefits you can build up over your working life (excluding the state pension) before you’ll have to pay extra tax (known as the lifetime allowance charge). The LTA is £1,073,100 (2020/21).
If you think you might be affected by any of the above tax allowances, you should let Nestlé Pensions know.
You can find out more about tax on private pension contributions at www.gov.uk/tax-on-your-private-pension/annual-allowance