Personal tax – guidance

Personal Allowances: adjusted net income

How to work out your adjusted net income and the circumstances when it can affect your tax liability.

What adjusted net income is

Adjusted net income is total taxable income before any Personal Allowances and less certain tax reliefs, for example:

  • trading losses
  • donations made to charities through Gift Aid
  • pension contributions paid gross (before tax relief)
  • pension contributions where your pension provider has already given you tax relief at the basic rate

When your tax liability can be affected by adjusted net income

Your adjusted net income will affect your tax if any of the following apply. You are liable to the:

  • income-related reduction to the Higher Personal Allowances - where you were born before 6 April 1938 and have an adjusted net income of over £27,700 (tax year 2015 to 2016)
  • income-related reduction to the Personal Allowance - where you have an adjusted net income over £100,000 (regardless of your date of birth)
  • High Income Child Benefit charge - where you have an adjusted net income above £50,000

How to work out your adjusted net income

Work out your adjusted net income by following steps 1 to 4 below.

Step 1 - work out your ‘net income’

Add up your taxable income.

Include things like:

  • money you earn from employment (including any benefits you get from your job)
  • profits you make if you’re self-employed including from services you sell through websites or apps
  • some state benefits
  • most pensions (including the State Pension, company and personal pensions and retirement annuities )
  • interest on savings and pensioners bonds
  • dividends from company shares
  • some rental income
  • income from a trust

Take off any tax reliefs that apply like:

  • payments made gross to pension schemes - those that have been made without tax relief
  • trading losses, for example trade loss relief or property loss relief
  • personal savings allowance if you have savings interest and you are not an additional rate tax payer
  • dividends allowance for part of your income if you are paid dividends

This is your ‘net income’.

Your net income is then adjusted - steps 2 to 4 below.

Step 2 - take off Gift Aid donations

If you made a Gift Aid donation, take off the ‘grossed-up’ amount - what you paid plus the basic rate of tax.

So, for every £1 of Gift Aid donations you made, take £1.25 from your net income.

Step 3 - take off pension contributions

If you made a contribution to a pension scheme where your pension provider has already given you tax relief at basic rate, take off the ‘grossed-up’ amount - what you paid plus the basic rate of tax.

So, for every £1 of pension contribution you made, take £1.25 from your ‘net income’.

Step 4 - add back tax relief for payments to trade unions or police organisations

Tax relief of up to £100 is available if you make payments to a trade union or police organisation for superannuation, life insurance or funeral benefits.

If you took off an amount for this type of payment at step 1, add it back.

Examples - adjusted net income

For 2015 to 2016, Charles’ total taxable income is £40,000, made up of:

  • pensions (including State Pension) £25,000
  • bank interest £10,000
  • dividends £5,000

There are no further adjustments to Charles’ total income, so this is his ‘net income’.

Charles makes Gift Aid donations of £1,000. He can take £1,250 off his net income, £1,000 plus £250, the value of the basic rate tax.

Charles’ adjusted net income is £38,750 (£40,000 less £1,250).

Charles’ adjusted net income is used to work out his Personal Allowance.

For 2015 to 2016 Bill’s taxable income is £115,000, made up of:

  • income from self-employment £85,000
  • income from property £20,000
  • bank interest £10,000

Bill makes private pension contributions without tax relief of £10,000.

Bill’s net income is £105,000 (£115,000 less £10,000).

There are no further adjustments to Bill’s net income, so this is his adjusted net income.

Bill’s adjusted net income is used to work out his Personal Allowance.

Clara - High Income Child Benefit charge

Clara’s total taxable income is £60,000, made up of:

  • income from employment £55,000
  • bank interest £5,000

Clara makes private pension contributions without tax relief of £4,750.

Her net income is £55,250 (£60,000 less £4,750).

Clara makes Gift Aid donations of £1,000. She can take £1,250 off her net income, £1,000 plus £250, the value of the basic rate tax.

Clara’s adjusted net income is £54,000 (£55,250 less £1,250).

Clara’s adjusted net income is used to work out her High Income Child Benefit charge.