Why Adjusted Net Income Matters: Understanding the Tax Impact

What is Adjusted Net Income?

Adjusted net income is a crucial figure when it comes to calculating tax liabilities in the UK. It determines your entitlement to personal allowances and affects other tax-related calculations like the High Income Child Benefit Charge.

In essence, adjusted net income is your total taxable income before personal allowances are applied, but after deducting specific allowable expenses such as trading losses, pension contributions, and Gift Aid donations.

Step-by-Step: How to Calculate Adjusted Net Income

Step 1: Work Out Your Net Income

Start by calculating all your taxable income. This includes:

• Salary or income from employment
• Self-employment profits
• Taxable state benefits
• State and private pensions
• Interest from savings
• Dividends from shares
• Rental income
• Income from trusts
• Overseas income

Next, subtract any trading losses and gross pension contributions (those made without automatic tax relief). The result is your net income.

Step 2: Deduct Gift Aid Donations

If you’ve made any charitable donations through Gift Aid, gross them up by multiplying the donation by 1.25 (to reflect basic rate tax relief) and subtract the result from your net income.

Step 3: Deduct Grossed-Up Pension Contributions

Now deduct any personal pension contributions that received basic rate tax relief. Multiply the net amount by 1.25 to gross it up and reduce your net income accordingly.

Step 4: Add Back Certain Deductions

If you claimed tax relief for union or police federation subscriptions (typically capped at £100), and this was deducted earlier, it must be added back into your adjusted net income calculation.

Example: Alison’s Adjusted Net Income

Let’s say Alison has the following financial details:

• Salary: £60,000
• Rental income: £18,000
• Bank interest: £325
• Dividends: £1,250

She also:

• Incurred £4,000 in trading losses
• Donated £50 (net) to charity via Gift Aid
• Contributed £4,000 (net) to a personal pension

Step-by-step breakdown:

• Total income: £79,575
• Net income: £75,575 (after subtracting £4,000 trading losses)
• Gift Aid grossed up: £62.50
• Pension contributions grossed up: £5,000
• Adjusted net income: £70,512.50

Why It Matters: Key Tax Implications

1. Personal Allowance Reduction

The standard personal allowance for 2025/26 is £12,570. If your adjusted net income exceeds £100,000, your allowance is reduced by £1 for every £2 over the threshold. Once your income reaches £125,140, the allowance is completely lost.

2. High Income Child Benefit Charge (HICBC)

If your adjusted net income is over £60,000, you’ll start to repay child benefit through the HICBC. The charge is:

• 1% of the child benefit for every £200 your income exceeds £60,000
• At £80,000 or more, the entire child benefit amount is clawed back