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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.

Salary sacrifice

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.

For example:

DC Start

John's salary is £20,000. He contributes 4% of his salary. The monthly total going into his account is as follows:

£67 from John
+
£83 from Nestlé
=
£150in total

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.

£67 from John
-
£16 Tax and NI
=
£59monthly cost to John

DC Core

Jane's salary is £25,000. She contributes 5% of her salary. The monthly total going into her account is as follows:

£104.17 from Jane
+
£156.25 from Nestlé
=
£260.42in total

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.

£104.17 from Jane
-
£33.34 Tax and NI
=
£70.83monthly cost to Jane

If Jane were to contribute 8% of her salary, the monthly total going into her account would change as follows:

£166.67 from Jane
+
£250.00 from Nestlé
=
£416.67in total

Then, because the £166.67 includes tax and national insurance, Jane's contribution only costs him

£166.67 from Jane
-
£53.34 Tax and NI
=
£113.33monthly cost to Jane

DB Core

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.

£100 from John
-
£32 Tax and NI
=
£68monthly cost to John

DB CorePlus

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.

£150 from Jane
-
£48 Tax and NI
=
£102monthly cost to Jane

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).

Tax allowances

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 2019/20 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'.

*'Flexibly' means:

  • 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 over £110,000 a year

For most people, if your total taxable income (including any income you gave up as part of a salary sacrifice arrangement) is £110,000 or more, your annual allowance will be reduced by £1 for every £2 you earn including your pension contributions (known as your adjusted income) above £150,000. If your adjusted income is £210,000 or over, your AA is reduced to £10,000. This is known as the ‘tapered annual allowance’.

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 £1.055 million (2019/20).