Pensions and tax
Tax on contributions
Paying into a pension is a really tax-efficient way of saving for your future. Because contributions are taken from your salary before you’re taxed, it only costs you £80 to save £100 into your pension if you pay tax at the basic rate. And if you pay through salary sacrifice, you’ll make national insurance savings too.
If you pay into your pension through salary sacrifice, your salary is reduced by the amount you've decided to contribute. Nestlé then pays this money into your pension on your behalf. This means you don’t pay national insurance on the value of your pension contributions, so they cost you even less.
To find out more about salary sacrifice, go to Making contributions.
John's salary is £20,000. Every month, he contributes 4% of his pay into his DC Start account and Nestlé contributes 5%:
Remember, you make tax and national insurance savings on the money you pay into your pension savings account. This means John’s contributions cost him less than this:
Jane's salary is £25,000. Every month, she contributes 5% of her pay into her DC Core account and Nestlé contributes 7.5%:
Remember, you make tax and national insurance savings on the money you pay into your pension savings account. This means Jane’s contributions cost her less than this:
If Jane contributed 8% of her salary, Nestlé would contribute 12%, so the monthly total going into her account would be:
Because the £166.67 Jane would pay includes tax and national insurance, her contribution would only cost her:
John's salary is £20,000. Members of DB Core currently contribute 7.3% of their salary (up to the pensionable earnings cap), which means that John pays £122 into his pension every month.
Nestlé also contributes whatever it needs to in order to provide John’s pension.
Remember, you make tax and national insurance savings on the money you pay into your pension. This means John’s contributions cost him less than this:
Jane's salary is £20,000. Members of DB CorePlus currently contribute 10.8% of their salary (up to the pensionable earnings cap), which means that Jane pays £180 into her pension every month.
Nestlé also contributes whatever it needs to in order to provide Jane’s pension.
Remember, you make tax and national insurance savings on the money you pay into your pension. This means Jane’s contributions cost her less than this:
In these figures, we’ve used the words ‘pay’ or ‘salary’ as shorthand for pensionable earnings. We also assume you pay tax at the basic rate and make your contributions through salary sacrifice, so you’ll make national insurance savings too.
There are three types of annual allowance to bear in mind when saving into your pension – the standard annual allowance, the money purchase annual allowance, and the tapered annual allowance for higher earners.
Pensions are a very tax-efficient way to save – but there are some limits to the amount of tax relief you can get. If you go above these limits, you may have to pay a tax charge.
You may also have heard of the lifetime allowance, but the government currently intends to abolish this completely in the 2024/2025 tax year.
The standard annual allowance
This is the maximum amount you can save across all registered UK pension schemes in a single tax year. If you exceed it, you may have to pay a tax charge. The annual allowance is £60,000 for 2023/24 for most people. It excludes the state pension.
If you exceed the annual allowance and have no ‘carry forward’, you must declare the excess and pay the charge as part of your annual income tax return. 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. See If you go over the annual allowance.
It’s your responsibility to check your pension savings against the annual allowance. If you think you might exceed it, contact Nestlé Pensions to let us know.
The money purchase annual allowance
If you access your benefits flexibly, your annual allowance will be lower.
Accessing benefits flexibly means:
- you took all of your retirement savings as cash, or
- you're withdrawing money directly from your retirement savings to provide a regular income – this is known as drawdown.
So, if you:
- started to take benefits from a defined contribution (DC) pension arrangement (like DC Core or DC Start) on or after 6 April 2015, and
- accessed your benefits from that arrangement flexibly on or after 6 April 2015
...then the total amount of money you can pay into any registered UK scheme is £10,000 a year. It’s important to remember that this figure includes contributions from Nestlé too.
The money purchase annual allowance won’t apply to you if used your defined contribution benefits to buy an annuity or you took 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 that you gave up as part of a salary sacrifice arrangement) is around £200,000 or less, your annual allowance will still be £60,000.
The tapered annual allowance
If you earn more than around £200,000 a year (including any income you gave up as part of a salary sacrifice arrangement), His Majesty’s Revenue and Customs (HMRC) carries out something called an adjusted income test.
As part of this, HMRC looks at:
- your total taxable income for that tax year,
- any savings that you and your employer made to your defined contribution (DC) pension account(s), and/or
- the value that HMRC puts on how much your defined benefit (DB) pension has increased by over the year.
This is called your adjusted income. If it’s more than £260,000 a year, your annual allowance will be reduced by £1 for every £2 that your adjusted income goes over £260,000. This is called the tapered annual allowance.
If you earn more than £360,000 a year
If your adjusted income is £360,000 or more, your annual allowance is reduced to £10,000.
Measuring your contributions against the annual allowance
Every tax year – which runs from 6 April to 5 April the following year – the pension benefits you earn in the Fund are measured against the annual allowance. This is called the pension input period.
If you go over the annual allowance
If you do go over the annual allowance, you may be able to carry forward any unused allowance from the three previous years to offset or reduce your tax charge. You must have been a member of a registered pension scheme for all of that time.
The lifetime allowance
In the Spring 2023 budget, Chancellor Jeremy Hunt announced his intention to abolish the lifetime allowance. The abolishment is scheduled to take place in two stages.
Phase 1 – the lifetime allowance will stay at its 2022/2023 level of £1,073,100, but the lifetime allowance tax charge will no longer apply.
Any pension or benefits you’ve built up over the lifetime allowance in the 2023/2024 tax year will still need to be calculated, but you’ll now pay tax at your marginal rate on them – however you decide to take them.
Phase 2 – the Chancellor then intends to abolish the lifetime allowance completely during the 2024/2025 tax year.
Mr Hunt also stated that he intends to freeze the maximum amount you can take as tax-free cash from your pension(s) when you retire at 25% of the current lifetime allowance limit of £1,073,100 – or £268,275.
These figures may be different if you have applied for lifetime allowance protections.
You can find out more about these protections and tax on private pension contributions at gov.uk/tax-on-your-private-pension/lifetime-allowance.
If you think you might be affected by any of these tax allowances, get in touch with Nestlé Pensions and let us know.