Adjusted net income is a key measure of income for tax purposes. It is total taxable income before taking account of any personal allowances and after deducting trading losses, pension contributions and certain tax reliefs, such as Gift Aid.

The calculation

Step 1

Calculate your net income for the year.

To do this you first need to work out your taxable income. This will include:

· income from employment;

· profits from self-employment;

· taxable state benefits;

· most pensions, including the state pension and personal and occupational pensions;

· interest;

· dividends;

· rental income;

· trust income; and

· any foreign income.

You then need to deduct any trading losses and payments made gross to pension schemes (i.e. without tax relief).

The result is your ‘net income’. This is ‘adjusted’ to arrive at your ‘adjusted net income’.

Step 2

Deduct the grossed up amount of any Gift Aid donations.

Step 3

Deduct the gross amount of any pension contributions in respect of which tax relief has been given. The amount of the contributions must be grossed up at the basic rate of tax (so multiply the amount of the contribution by 1.25).

Step 4

Add back any tax relief for payments to trade unions or police organisations.

Tax relief of up to £100 is available for payments in respect of superannuation, life insurance or funeral benefits. If this has been deducted in step 1, it should be added back.

Example

Alison has the following income:

· salary: £60,000;

· rental income: £18,000;

· bank interest: £325; and

· dividends: £1,250.

She also made trading losses of £4,000 from a self-employment and Gift Aid donations (net) of £50.

She also made contributions of £4,000 to a personal pension scheme net of basic rate tax.

Alison’s taxable income is £79,575 (£60,000 + £18,000 + £325 + £1,250).

Her net income is £75,575 (£79,575less trading losses of £4,000).

Her adjusted net income is £70,512.50 (net income of £75,575 less grossed up Gift Aid donations of £62.50 (£50 x 1.25) less gross pension contributions of £5,000 (£4,000 x 1.25)).

Personal allowance

A person’s adjusted net income is used to determine whether the personal allowance is reduced or lost. The personal allowance (set at £12,570 for 2025/26) is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. It is lost entirely once adjusted net income reaches £125,140.

High Income Child Benefit Charge

The High Income Child Benefit Charge claws back child benefit from the claimant or their higher earning partner once adjusted net income exceeds £60,000. The charge is equal to 1% of the child benefit for the year for every £200 by which adjusted net income exceeds £60,000. Once adjusted net income reaches £80,000, the charge is equal to the child benefit for the year.