How do you calculate adjusted net income?

To calculate adjusted net income, you will need to look at a taxpayer’s total taxable income, before personal allowances, and then deduct any trading losses, gift aid donations, gross pension contributions and pension contributions where the pension provider has already provided tax relief at the basic rate.

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Calculating the adjusted net income amount is necessary if any of the following apply:

• A taxpayer is liable to an income-related reduction to the personal allowance – when their adjusted net income is over £100,000 (regardless of their date of birth);
• A taxpayer is liable to the High Income Child Benefit charge – when their adjusted net income is above £50,000.

It is worth noting when reviewing a client’s taxable income that if certain thresholds are exceeded the personal allowance may be withdrawn completely. For example, if a client decides to draw-down a significant lump sum from their pension pot, the payer may deduct 40% Income Tax, but this may not cover all the taxes due. If the amount tips their annual income over the required limit (£125,000 for 2019-20), perhaps for the first time, and their personal allowance is lost, additional taxes may fall due the following January.

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