Updated 6th March 2024
How To Calculate Adjusted Net Income
Why might you need to do this?
There are three potential use cases:
1) To work out your personal allowance
2) To work out your tapered pension allowance if your income is more than £260,000
per year
3) Keeping your taxable income at or below certain thresholds can have advantages.
a) If you earn over £100,000, you enter into the dreaded 60% tax band, and you
lose eligibility for tax-free child care.
b) If you, or your partner, earn over £50,000, for each £100 you earn over the
threshold, 1% of your family’s entitlement for Child Benefit is clawed back
through tax. If you earn over £60,000, you lose all of it. However, from April
6th 2024, these limits are changing so that your benefit starts to be clawed
back after you earn £60,000, and you lose 1% for every £200 you earn over
this, meaning that if you earn over £80,000 you get nothing.
The third use case is the one we’re going to be focusing on in this guide.
The problem.
To bring your income below these thresholds, you can make tactical pension contributions at
the end of the tax year.
The question is, how large a pension contribution do you need to make?
To answer this, we first need to establish what your Adjusted Net Income is.
There is a guide on the HMRC website; you should use this as your source of truth (in case
our guide has not been updated recently). However, many people find the HMRC guide
unclear, which is why I have created this.
Step-by-Step Guide
This is the simple formula, but as you’ll see, it’s slightly more nuanced than this:
The Formula
Step 1 - Taxable Income
Minus
Step 2 - Gifts
Minus
Step 3 - Pension Contributions
Plus
Step 4 - Tax relief for payments to unions or police orgs
Equals
Adjusted Net Income
Step 1 - Taxable Income
Add up your taxable income, including:
● Salary
● Bonus
● Taxable work benefits e.g Car Allowance, Private Medical Cover (This should be on
your P11D)
● Dividends (total dividends, ignore the dividend tax allowance)
● Interest on savings and pensioners' bonds (total interest, ignore personal savings
allowance)
● Taxable state benefits
● Pension income
● Rental income
● Profits from self-employment
Make sure to deduct from the total any salary or bonus that you have sacrificed into a
pension, before paying tax on it.
Your taxable income should only include the salary or bonus you have paid tax on. You
should be able to see on your payslip if pension contributions have come out before or after
tax.
Remember, we’re only talking about contributions you have made, not your employer.
Also, make sure to deduct any trading losses from the last two, for example, trade loss relief
or property loss relief.
Step 2 - Gifts
Gifts to charity can be tax deductible.
If you have made a gift aid donation, you can reduce your net income by the “grossed-up
amount” i.e. what you paid plus basic rate tax.
So, if you made a donation of £100, you would take £125 off your taxable income.
Step 3 - Pension contributions
This is the bit that confuses people.
In step 1) we deduct from salary or bonus any pension contributions that have been made
before tax, or gross.
In this step, we deduct pension contributions that you have made with money you have
already paid tax on.
These types of contributions include:
- Personal contributions to a private pension (such as a SIPP)
- Contributions to a net-pay workplace pension scheme
With both of these, once you have made a pension contribution, the scheme will
automatically claim basic rate tax relief from HMRC and add this to your contribution.
So, if you make a £100 (net) contribution, this becomes a £125 (gross) contribution once the
tax relief has been applied.
The gross figure is the one we are looking for here. So in this example, we would deduct
£125 from our taxable income.
If you’re not sure what type of pension scheme your employer operates, you should ask HR
or management. However, you should be able to tell from your payslip whether your pension
contributions are taken before or after tax.
Step 4 - 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.
The Formula
Step 1 - Taxable Income
Minus
Step 2 - Gifts
Minus
Step 3 - Pension Contributions
Plus
Step 4 - Tax relief for payments to unions or police orgs
Equals
Adjusted Net Income
What now?
If your adjusted net income ends up being £110,000, to get this down to £100,000, you can
do two things:
1) Sacrifice more salary or bonus
You could ask your employer to sacrifice more of your salary or bonus into your pension.
However, if you are making this calculation right at the end of the tax year, which is often the
case, your employer may not give you the flexibility you need.
2) Make a personal pension contribution
Alternatively, you could make a personal contribution to a pension such as your workplace
pension or a private pension (like a SIPP).
In this example, to get our adjusted net income down to £100,00, we need to make an
additional £10,000 gross pension contribution.
However, as demonstrated in the video, we only need to contribute £8,000 to the pension,
because the scheme will add basic rate tax relief onto this, grossing it up to £10,000.
Remember, if you’re a higher or additional rate taxpayer, you’ll need to claim back your extra
tax relief via your self-assessment tax return.
If you are in doubt about your net income calculation, then, to be safe, it may be a good idea
to make a larger pension contribution to bing you safely below the limit you're aiming for. If,
of course, that is affordable.